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Parkway Properties, Inc. (NYSE:PKY)

Q1 2013 Earnings Conference Call

May 7, 2013 11:00 ET

Executives

Jeremy Dorsett - Executive Vice President and General Counsel

Jim Heistand - President and Chief Executive Officer

David O’Reilly - Chief Financial Officer and Chief Investment Officer

Jayson Lipsey - Chief Operating Officer

Analysts

Jordan Sadler - Keybanc Capital Markets

Craig Mailman - Keybanc Capital Markets

Alex Goldfarb - Sandler O’Neill

Josh Attie - Citi

John Guinee - Stifel Nicolaus

Young Ku - Wells Fargo

Rich Anderson - BMO Capital Markets

Operator

Greetings, and welcome to the Parkway Properties, Inc First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jeremy Dorsett, Executive Vice President and General Counsel for Parkway Properties. Thank you, Mr. Dorsett, you may begin.

Jeremy Dorsett - Executive Vice President and General Counsel

Good morning, and welcome to Parkway’s first quarter 2013 earnings call. With us today are Jim Heistand, President and Chief Executive Officer; David O’Reilly, Chief Financial Officer and Chief Investment Officer; and Jayson Lipsey, Chief Operating Officer.

Before we begin, I would like to direct you to our website at pky.com, where you can download our first quarter earnings press release and the supplemental information package. The earnings release and supplemental package both include a reconciliation of non-GAAP measures that will be discussed today to the most directly comparable GAAP financial measures.

Certain statements made today that are not in the present tense or that discuss the company’s expectations, are forward-looking statements within the meaning of the federal securities laws. Although the company believes that these expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statements disclaimer in Parkway’s first quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

I will now turn the call over to Jim.

Jim Heistand - President and Chief Executive Officer

Good morning and thank you for joining us today. We made a significant amount of progress last year, excluding our strategy of building a high quality portfolio concentrated and targeted in high growth sub-markets throughout the Sunbelt region, and we believe our first quarter results provide an early validation of the strategy.

Our occupancy increased 70 basis points during the quarter to 88.7%. At the end of the quarter, we are 89.7% leased. Same-store NOI increased in the year ago on both the cash and GAAP basis and our NOI margin grew 200 basis points to 52.2%. We completed general acquisitions during the quarter, remained under contract to acquire the US Air’s that announced yesterday that we are under contract to acquire Lincoln Place in Miami, which David will describe in more detail later in the call.

From an operational standpoint, we feel we are off to a good start this year. The leasing demand has remained steady in most of our markets as fundamentals continue to slowly improve. Our strategy of acquiring critical mass in our targeted sub-markets has only proven effective at several of our properties. Well, we have had the opportunity to move and accommodate tenants, the desire to stay in a particular area, but don’t have enough space at our existing property. We also continue to benefit from the flight-to-quality mindset of our respective tenants as we now have some of the better assets in each of our respective targeted sub-markets.

I would like to point out though as we have mentioned before, we are taking proactive steps at specific properties to create long-term value through our value-added income strategy. This will result in temporary negative impact to our occupancy and financial results during the third quarter. I will believe these steps will create greater long-term value at the property level.

From an investment standpoint, we continue to see opportunities to enhance the growth of our portfolio at attractive pricing with assets that complement our long-term investment strategy. Our focus at Lincoln Place will be our first expansion into the South Florida market with a high quality of 100% leased core assets and we hope to build the net investment with core plus and value-added investments in the South Florida area over time. We are also constantly evaluating in all of the sub-markets throughout the Sunbelt and we believe there will be opportunities to continue to build a portfolio of high-quality assets in key targeted areas.

As from a financial perspective, we fully intend to maintain the conservative and flexible approach to our balance sheet as we grow the company. Our recent capital raise allowed us to aim our 8% new preferred stock. We talk to our shareholders with benefit from this redemption as we will improve our leverage metrics as well as three of our $10.8 million of cash flow for the company each year. We have made significant improvements in nearly all of our leverage metrics in the year ago and we will continue to take steps that could help us obtain a credit rating at some point in the near future.

I will now turn the call over to David to give an update on our investment activities during the quarter.

David O’Reilly - Chief Financial Officer and Chief Investment Officer

Thank you, Jim. Yesterday, we announced our pending purchase of Lincoln Place, which is 140,000 square foot office and retail tower in the South Beach submarket of Miami. I would like to first discuss some of the market fundamentals for South Florida and then cover the specifics related to the Lincoln Place. The Miami Area is home to approximately 2.6 million people who are around 13% for Florida’s population. The unemployment rate for the Miami MSA dropped to 7.9% based on preliminary estimates in February, which is down from 8.7% a year ago. In the office sector Miami had a strong year of leasing in 2012 with over 844,000 square feet of positive net absorption, which is approximately 2% of the existing inventory. There was another 110,000 square feet of positive absorption during the first quarter bringing the current vacancy rate to just over 18%.

There are a number of submarkets in the Miami Area, that are either land constrained or that offers significant barriers to new entry for office development. South Beach where Lincoln Place is located is one of these submarkets bordered by both the Atlantic ocean and Biscayne Bay with submarket of 1.9 million square feet of course one of the lowest vacancy rates in all of Miami at 8.7% and some of the highest asking rental rates averaging over $37 per square foot. While South Beach is the beneficiary of one of the most active hotel sectors in the country and the dynamic high-end retail presence, we believe the vibrancy of this submarket creates true opportunity to create value for the well located office and retail property.

Lincoln Place is the high quality asset constructed in 2002 that is located one block away from the world-class retail destination of Lincoln Road. The property is currently 100% leased through June of 2021 with no early termination or renewal options to LNR Corporation, which is a diversified real estate investment finance management and development company. This core investment is expected to generate steady cash flows through the expiration of LNR’s lease. And we believe there are several opportunities to create additional value whether they choose to stay or vacate for several reasons including the supply demand dynamic in the submarket as well as our ability to extract value from both the 29,000 square feet of retail space and the attached 534 parking space garage.

The terms of the lease currently gives LNR control over the office space, the retail space as well as the five-story garage. LNR currently sub-leases out the first floor retail space, which generates the highly attractive rate for them given the building’s proximity to Lincoln Road. And they operate the garage which provides parking for day time office times and also generates revenue from night time and week-end parking for those visiting one of the many shopping or dining venues in the South Beach area.

While LNR is the current beneficiary, these two revenue sources they eventually will be additive to Parkway upon the expiration of LNR’s lease. To acquire Lincoln Place, we are assuming the existing first mortgage secured by the property, which has the current outstanding balance of approximately $49.6 million on fixed interest rate of 5.9% that matures in June 2016. And we are issuing 900,000 operating partnership units in the cellar which are convertible on a one-to-one basis and to share as a Parkway common stock.

Based on Parkway’s closing stock price on Friday of $18.20 the implied purchase price would be approximately $66 million or $472 per square foot. Using this implied purchase price, we expect the property to generate an initial full year cash NOI yield of approximately 6.7%. Replacement costs in South Beach are significant higher than most of our markets and continue to escalate given that there are no other vacant parcels of land available as well as a significantly more restricted zoning and permitting environment.

Closing is expected to occur by the end of the third quarter subject to customary closing conditions, the successful assumption of the existing mortgage loan and Parkway’s satisfactory completion of due diligence. During the first quarter we completed the purchases of TowerPlace 200 in Atlanta and the Deerwood portfolio on Jacksonville.

Late in the quarter we also completed the purchase of our co-investors 70% interest in the three office assets located in Tampa, that were previously held in Parkway’s funds and joint venture. These assets have performed well since they were acquired by Fund II and we believe there is still opportunity to add value through occupancy gains and rental rate growth to Parkway. We also continued to make progress on exiting our non-core markets during the quarter with the sale of Atrium at Stoneridge. With this sale we have fully executed excuse me we have fully exited the Columbia, South Carolina. This sales generated approximately $3 million of net proceeds and resulted in a gain of $542,000 during the first quarter.

We also announced in March that we have entered into a purchase and sale agreement to acquire an approximate 75% interest in the U.S. Airways Building in the Tempe submarket of Phoenix. The U.S. Airways Building which shares a parking garage with our recently acquired Tempe Gateway property is in 225,000 square foot office tower built in 1999 that is 100% leased the U.S. Airways through April 2024. U.S. Airways does have the option to early terminate its lease on December 31, 2016 or December 31, 2021 with 12 months prior notice and payment of associated termination fees. However, similar to Lincoln Place, we believe there is upside potential to either our renewal or a re-tenanting of the property upon their expiration given the dynamics of the Tempe submarket. U.S. Airways will maintain their 25% ownership interest in the property, closing is expected to occur by the end of the second quarter subject to customary closing conditions.

I will now turn the call over to Jayson to give an update on our operations.

Jayson Lipsey - Chief Operating Officer

Thanks David. Our team remains focused on operating our portfolio in a manner that increases cash flow as well as the value of our buildings. We continue to take a proactive approach to leasing and controlling operating expenses those initiatives which have only benefited from the quality of our assets in our increasing scale and core submarkets. Our leasing strategy continues to prove effective. In the first quarter we continued to have steady leasing activity completing 147,000 square feet of new and expansion leases and 354,000 square feet of renewals.

Total leasing costs for this activity dropped to $3.42 per square foot per year with rental rates staying about $25 per square foot. Our occupancy improved 70 basis points during the quarter to 88.7% excluding the acquisitions and dispositions that occurred during the quarter our occupancy include 22 basis points compared to the prior quarter. Our customer retention rate was over 78% at base rates that were only 1.2% below the expiring rental rates. Including leases that have been signed but not yet commenced our portfolio was 89.7% leased at the end of the quarter. Page 22 of our supplemental report shows where each of these leases are located and why they’re scheduled to commence – when they are scheduled to commence.

We continue to experience positive leasing momentum in our core submarkets as office users seek high quality assets in the best submarkets. One specific example of this activity is our Tempe portfolio. Recent leasing activity in Tempe includes the 23,000 square foot lease at Hayden Ferry Lakeside I and 8000 square foot least at Hayden Ferry Lakeside retail and nearly 17,000 square feet signed at our recently acquired Tempe Gateway assets. Tempe Gateway is now over 80% leased compared to an occupancy rate of 73.9% when we acquired it in December.

Not only our recent acquisitions performing well, but we’re also seeing improvement in our same store portfolio. Same store recurring NOI increased 1.6% on a GAAP basis compared to the prior year and 14.4% on a cash basis. The large increase in cash NOI was primarily related to a pre-rent period in the prior year for our 225,000 square foot lease in Houston. Our NOI margins also improved during the quarter to 62.2%, which is 200 basis points higher than the prior year. We are pleased with our leasing progress so far this year, but as a remainder we do expect our occupancy to decline during the third quarter resulting from two properties where we are pursuing a value add leasing strategy.

At 400 North Belt in Houston we’ve executed an early termination of a 94,000 square foot tenant that will be effective July 31st. This tenant is currently paying the gross base rental rate of $14.11 per square foot which we estimate to be approximately $9 per square foot below current market rates for that property. We have not assumed that this space is backfilled in our 2013 outlook, but we already have prospects interested in leasing a significant portion of the space.

Additionally, we’ve executed an early contraction and 10-year renewal with K&L Gates at Hearst Tower in Charlotte. On July 31st, K&L Gates were dedicated approximately 49,000 square feet on the 41st and 42nd floors of Hearst Tower, which will become one of the best lots of contiguous space in CBD. In our view long-term value creation potential from both of these leases far away initial term negative impacts that may occur to our quarterly occupancy and for financial results.

With that I’ll turn the call back over to Dave to discuss our financial results.

David O’Reilly - Chief Financial Officer and Chief Investment Officer

Thank you, Jayson. We completed the first quarter with FFO of $0.30 per share, recurring FFO of $0.33 per share and FAD of $0.22 per share. We have provided the reconciliation of FFO, recurring FFO and FAD to net income on page nine of the supplemental report. As a result of the public equity offering which closed on March 25th, our revolving credit facility balances paid in full as of the end of the first quarter and Parkway held approximately $75 million in cash and cash equivalents, of which $46 million was Parkway’s share. Please note that these balances does not include the impact of a redemption of our seriously preferred stock, which was completed on April 25th.

The purchase of the U.S. Airways Building, we should be expected to close by the end of the second quarter more of the purchase of Lincoln Place and related issuances of OP unit which is expected to close by the end of the third quarter. We ended the quarter with the net debt EBITDA of 4.8 times and a net debt plus preferred to EBITDA of 5.9 times. Pro forma for the redemption of our preferred stock and the purchases of the U.S. Airways Building and Lincoln Place we estimate that our net debt to EBITDA will remain within our stated targeted range of 5.5 to 6.5 times.

Based on our results during the first quarter and revised projections for the remainder of the year, we are revising our FFO outlook range to a range of $1.10 to $1.20 per share for calendar year 2013. Please note that this guidance is based on reported FFO and includes the negative impact of the one-time non-cash charge related to the redemption of our Series D preferred stock, totaling approximately $6.6 million or approximately $0.10 per share during the second quarter of 2013. This chart represents the difference between costs associated with the original issuance of these shares, including the price at which these shares were paid and the redemption price paid on April 25th.

Excluding this one-time non-cash charge our FFO outlook range will be increased to $1.20 to $1.30 per share. This outlook also includes the impact of all announced acquisitions including the issuance of OP units in conjunction with the purchase of Lincoln Place. We have provided updated guidance ranges for the underlying assumptions related to our FFO outlook in our first quarter earnings release. As you will see in those updated guidance ranges we have anticipated a non-cash share-based compensation charge in G&A of $4.5 million to $5.5 million. Please note that we have not yet started to expanse any charges associated would be new share based compensation plan, which was disclosed in our recent proxy and will be boarded on in our annual meeting of stockholders on May 16th.

We will begin to expense this plan only if and when we receive stockholder approval. The actual expense associated with these grants is dependent on the public price for our common stock on the date of adoption of the plan by our stockholders, which could exceed our assumed price and result in a share-based compensation charge is greater than we have assumed in our outlook. As is our common practice we have not assumed in our outlook any additional investments dispositions other than those announced or any potential capital markets activities. And we will provide updates for our outlook should materials on occurred that would change our stated ranges.

That concludes our prepared remarks and we are now happy to open up the call for any questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jordan Sadler with Keybanc Capital Markets. Please proceed with your question. Your line is live

Jordan Sadler - Keybanc Capital Markets

Thank you. I am here with Craig Mailman as well. I just wanted to dig into the Lincoln Place acquisition and the strategy surrounding that a little bit, where are rents versus market did you say and maybe could you provide the GAAP cap rate on the transaction?

Jim Heistand

Well, rent versus market office as I said in prepared remarks, office rents are coming at in the mid to high-30s, let’s call $36 a foot range. So, retail rents in that area are in the mid $50 to $60 on a triple net basis. All LNR’s payment rates and the terms of the lease from the stores and economic terms of that lease, but we think that their rate is all in below market, given that if we would renovate the office, released the retail and operated the garage some of those parts would be greater than the rent that we are receiving from LNR today.

David O’Reilly

And to get to your GAAP question Jordan we have not yet finished our mark to market analysis with the consultants that runs through that. There are annual escalations that will create a nominal amount of straight line rent, but in terms of a mark to market analysis there might be a modest positive adjustment, but I don’t – it won’t be huge.

Jordan Sadler - Keybanc Capital Markets

I would imagine there is offset from the in place debt being above market?

Jim Heistand

Yeah, there will be an impact of debt mark to market.

Jordan Sadler - Keybanc Capital Markets

Just to clarify, did you buy the garage as well, or you just control the garage?

Jim Heistand

It is part of the purchase, basically garage is part of the purchase as well, we get some kind of benefit of the income from operation, that benefit accrues to the tenant.

Jordan Sadler - Keybanc Capital Markets

Okay, that’s helpful, I think Craig has one as well.

Craig Mailman - Keybanc Capital Markets

Yeah, David just a clarification on – in guidance, you only have $300,000 lease term fees, is that – that’s related to the move outs that you have for the North Belt at the Hearst Tower are those considered to a non-recurring it’s not included in the guidance?

Jim Heistand

Lease term fees, while non-recurring, it seems to recur pretty often, but they are very difficult to predict. And as the – in the past years where the economy was softening, we saw a lot more in terms of term fees and down sizes. And we are seeing fewer and fewer lease term fees these days as you can see in our supplemental we have had some great activity in expansion and we do all these things. Very difficult to give guidance to project that because it’s usually an event that you are just not aware of going into the year, when it kind of coming and terminate and it’s one of those large known move outs it will be the writing on the wall for 12 months out. Given that we don’t have any of those and the leases that we are terminating at 400 North Belt in Hearst Tower those that we are actively terminating. It is difficult to project and as a result we try to take a pretty conservative number.

Craig Mailman - Keybanc Capital Markets

Okay and then just one other quick one. I missed what you have said on U.S. or in Tempe or you had any color on what they are planning on doing, I know you had enclosed the building, but just curious your talks with the tenant?

Jayson Lipsey

This is Jayson. We had very close dialogue with them. This building remains a very strategic asset for their company. As you would expect post-merger of this size there is still a lot of uncertainty around what their long-term plans are. What we do now is that we have announced that they intend to maintain operations in Phoenix that;’s our expectations that this program will ultimately be their last strong hold in Phoenix. So, if they are going to do anything tracking in the city they will contract teams into this building. It’s from our assessment the nicest part of the nicest facility that they have in Phoenix. And so I think that we are optimistic that this will remain an important location for them going forward.

Craig Mailman - Keybanc Capital Markets

Great, thank you.

Operator

(Operator Instructions) Our next question comes from the line of Alex Goldfarb from Sandler O’Neill. Please proceed with your question.

Alex Goldfarb - Sandler O’Neill

Yes, good morning.

Jim Heistand

Good morning, Alex.

Alex Goldfarb - Sandler O’Neill

Hey, I was just going more if you can – I know you are not given ‘14 guidance, but just conceptually you guys have bought a number of properties that are not fully stabilized and then there are other properties where you see opportunities to move tenants around. How should we think about you gave us some color as far as this year what you expect with occupancy. But going forward as we think about ‘14, should we think about occupancy sort of staying flattish as you move tenants around and trying to maximize the current in place leasing or should we expect to see occupancy is materially start to increase it’s basis leased up?

Jim Heistand

Alex, this is Jim. I would – I would tell you this as you know we haven’t had much of the static portfolio, but if you would have take the assets that we own today. And on the assumption of just those assets, it’s our view based upon the activity in the marketplace should be the quarterly of the assets, the demand in some markets we tipped, it’s our view that this portfolio definitely continues to add occupancy and get into the early 90s, below 90s.

David O’Reilly

And Alex, I would just add to that if we look for 2014 we’re right now expecting 8.8% of our portfolio to expire in 2014, which is historically a very low number if you couple that where is the fact that if you have opportunity to lease some of these fantastic new buildings that we purchased where there is some upside potential and you add that to what we believe our – the continuing were fundamental recovery in our market, we feel good about our potential we continue to drive occupancy in the portfolio overtime.

Alex Goldfarb – Sandler O’Neill

Okay. And then my second question is on the tenant retention certainly you guys have made tremendous drive year-over-year and that number is increasing. How much of the increase in tenant retention is fairly because the new team is in place and there is a sense of focus on running the buildings versus the markets are just improving and people either like what they are realized, they don’t have many options so they wanted just renew they can up around the way they used too, I’m just trying to understand how much is you are doing versus how much is the market sort of driving that retention?

Jim Heistand

Well, I think it’s a combination of factor in a minute, I love to say, it’s all out but the bottom line is that the assets we own right now are assets that people want to occupy. I mean, we talked about early on, it’s been a flight-to-quality as we try to purchase assets, as we have done one thing right has been purchasing the right assets that are going to generate the demand. And we’ve also I will tell you, one of things that’s benefited greatly is well, we have gotten, we have had two or three or four buildings in a particular submarket, the ability to move those tenants around and building the building as currently they are beginning to expand has been extremely helpful and we’ll continue to make that number better over time.

David O’Reilly

I think I apologize Jim, all those factors has been a huge help in this area. I think the one other thing that I would add is that even 18 months ago, even if we were renewing someone in many cases they were contracting. And so all those things even if we were successfully renewing tenant, it was still counting against our retention, because they were getting smaller based on the way we calculate retention and as the markets have continued to recover what we are seeing is that a lot of these new tenants as they are renewing, and not only renewing their standard. And so I think the market recovery in general has receptiveness as well.

Alex Goldfarb – Sandler O’Neill

Okay. And then just as a follow-up there, because the market never likes the slowing second derivatives, the 75%, 76% retention this past quarter, where should we expect this number to ultimately level out, should it stay here go higher, maybe go a little bit lower, just so that people aren’t surprised as because there is going to be volatility, what’s the good run bogie that we should think about?

David O’Reilly

Well, don’t forget we’ve got roughly 145,000 square feet that we are terminating in July in the third quarter. So, that in itself will have an adverse impact on it. But I would tell you with the exception of that, we feel pretty good about maintaining very strong retention numbers in all of our properties.

Jim Heistand

From a long-term prospective that we can keep something in the 70s workflow that is very challenging to do on a quarter-to-quarter basis given the as Jayson highlighted earlier, we have fewer expirations this year at less than 9% and any large move out or large renewals from that dramatic swing on that number quarter-to-quarter as we saw this quarter.

Alex Goldfarb – Sandler O’Neill

Okay, thank you.

Jim Heistand

Thank you.

Operator

Our next question comes from the line of Josh Attie with Citi. Please proceed with your question.

Josh Attie - Citi

Thanks, good morning. I just wanted to follow-up on Craig’s earlier question on U.S. Airways Building in Tempe, where they have the options that terminate in December 2016. Could you remind us how their net run of $17 to $18 compares to what the market rents are?

Jayson Lipsey

I think Josh, this is Jayson, we think that their rents are approximately in line with market, may be a little room to rollup and so they’re relatively in line, one of the things that we view as a good opportunity with this building is first, the strength of the Tempe market. If you look at what’s happened in a very short period of time that market has gone from nearly 20% vacant to – during the first quarter of 6.9% vacant in Class A market. We’ve seen significant absorption as I mentioned in my prepared remarks and then the other things that building specific yeah and so the market fundamentals will clearly drive rental rates which we are seeing in the portfolio.

The other thing that we view as an opportunity to building specifically which is while they do have an option to terminate they don’t have an option to terminate a portion of the state. So, they only have an option to terminate the entire portion of state and so, we do the likelihood outcome to be extended that they knew the contractors more of a negotiation around the spaces they want to maintain in the building, which we view is an optimal outcome so, even if they have that option it’s not an entirely flexible option in terms of variable determining.

Jim Heistand

And don’t forget Josh, they still had a 25% ownership in the property so, you are depending upon what their needs are, you could have negotiations around what that 25% is worth depending upon what they do.

Josh Attie – Citi

And I guess when you underwrote the building it sounds like you do – when you underwrote the building, did you look at what are the other large 10s in the market that could be a single tenant if they did vacate all things and then if they shows to keep a portion of the space how much it would cost to multi-tenant building.

Jim Heistand

Obviously we look at every scenario from them leaving a 100% paying the tenant building, we look at all, but I think one of the things that makes us feel pretty good about this as we’ve got more interest than what we have faced and the three buildings we own there are not count U.S. building., And as you know we still have that pad that we purchased for the fourth building. So, our belief in the strength of the market by virtue of the activity on the buildings we own gives us a great deal of comfort in that, Josh.

Josh Attie – Citi

And I just, I would add.

Jayson Lipsey

We actually, let actually, we need more space in that market.

Jim Heistand

Yeah, I think that’s our market is going through a very dynamic transformation and most of the new sources have reported recently that stayed strong is going to build a 1 to 1.5 million square foot campus, a little bit Hayden Ferry’s development, so they are own used and owned by themselves. And so if that is going to have a very significant impact on the dynamics in some market as well as other demand from providers to stay for we need to be in some market and so we have a very, very positive view of Tempe.

Josh Attie – Citi

Okay, thank you and just a separate question, can you – if you remind us what – how much you sold the lot of non-core assets over the last couple of years. How much more in the portfolio do you view as non-core and then also related to that you have a large assets in Philadelphia that if you consolidated from the fund, it’s kind of outside of the core southeast markets that you are in, how do you view that asset over time.

David O’Reilly

Sure, Josh, it’s David. First to answer your question on non-core assets, we have – what we’ve deem as non-core two assets remaining, one in (indiscernible) and one is Jacksonville, both of which that we are working hard on try to sell in the very near-term, both of those had some basically that would put us from getting the best off well amount of sales, but we are working hard on that front before we would actually ready to take those to market to sell them. So in terms of a non-core there are two assets as I mentioned I think you will continue to see that the active capital recyclers in terms of findings assets where we maximize value that are the low IRR assets we are continuing to sell those and redeploy the capital is more value creation opportunity. And there were some assets that remained that are in our targeted market that we love, but may be in the wrong submarket are not the quality of assets I know those type of assets we will continue to see as recycle. In terms of fairly that total still remains within the fund and fund too and it is a goal that we only own 19% up at the early stage like all of our assets we’re valuating net asset at a minimum two times a year to see when we hit the point where we maximize value and when the right time is to cycle that assets normally on behalf of our partners in the time as well.

Jim Heistand

Yeah, clearly Josh that we had any intention to expand into the clearly market it is an outlier no doubt at the right time we tell you.

Josh Attie - Citi

Okay. Thank you.

Operator

And our next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

John Guinee - Stifel Nicolaus

Great thank you very much. Couple of just curiosity questions probably David or Jim Lincoln Place looks to me like it’s either 3.8 per thousand parking or 4.8 per thousand parking which is extraordinarily high number for such an infill location any idea so what the zoning is in that part of southeast that require that into that still part of the zoning. And then second depending on how you do the math 17% to 18% of your portfolios the three buildings in Charlotte and my recollection is that you bought got 525 North Tryon at about 115 hours of quarter so but it had some upcoming re-leasing what’s the status there?

Jim Heistand

John, on your first question I’ll go back to the parking garage. The family who developed this so there another family the owner of family and I will tell you getting something develop in that area would have been difficult if you didn’t have the right relationships necessary, but that parking is such that – there such a demand for parking not just for that property but all the businesses that surround it very little public garage space in the southeast area. So it’s actually it exceeds what require for office that it is more of an entity for the beach that I’m sure they were supportive about by parking for all the retail and restaurants and tenants that are around which is why we think is a tremendous upside in terms of once we get the parking income coming to us over years or now. But -and very hard to replicate as well too.

John Guinee - Stifel Nicolaus

And then 525 Tryon?

Jim Heistand

Yeah we bought 525 I think it was in the high 60 occupancy when they close John. We’ve done a little bit of leasing end of the first quarter 72% we’re optimistic about our prospects there that Charlotte uptowns of market continues to tighten CBD vacancy ended the first quarter around 7.4% and so we’ve there are some large prospect in the market that will be great fit to that building and we have a good leasing strategy in plays and I think that will over time the over drive occupancy at the building.

David O’Reilly

I would say generally John, the value add components that we purchased I think we get a blended $460 million that around blended 80% we feel very good about the prospects that will building to exceed what we originally contemplated in terms of lease up those assets.

John Guinee - Stifel Nicolaus

Alright, thank you.

Jim Heistand

Materialize already.

David O’Reilly

Pheniox Tower at Westshore Corporate Center in Tempe Gateway.

John Guinee - Stifel Nicolaus

Alright, thank you.

Jim Heistand

Thank you, John.

David O’Reilly

Thank you, John.

Operator

Our next question comes from Young Ku with Wells Fargo. Please proceed with your question. Your line is live.

Young Ku - Wells Fargo

Great thank you. Just wanted to go back to the 400 North Belt early termination 94,000 square feet you said there were some good prospects but you don’t anticipate any backfill in 2013. So are you guys expecting that’s fully backfill sometime in 2014?

Jim Heistand

Well the same as great about Houston is largest market and it’s not unconceivable that the states or majority it can be filled with one deal. And so I think that its very pleasable that the lease state could be leased sometime in 2014 and possible that we could reach states in 2013 I think we just had a point in year were any leases that we’re able to sign for the stage probably wouldn’t commence until 2014 as a result wouldn’t impact our occupancy. But we (indiscernible) prospects in the Class A states and that’s our market remain very, very tight and there are few options and where among the best options for large units in that submarket. So we continue to see good activity on the states.

David O’Reilly

I think the best part of Young is that the – as we look at it from what the in place rents were on a tenant we terminated to the market rent on the prospects that we are talking about and had been basically conformed of what the market rate would be in other words we did it for the right reason, the market rates that we expected on getting the tenants will sign and we’ll get those market rate.

Young Ku - Wells Fargo

If you quantify in terms of number of active lookers or in terms of size and square footage that how much, how many prospects you have right now.

Jim Heistand

We’re – I’ll just sort of give you some general characterization around the pipelines for the building. At any point we would probably have 10 prospects that we are working with and they would range in size from 10,000 square feet to 100,000 square feet so also there is probably several hundred square feet of prospects for the space, but any one of them has a varying degree of probability and so some of them may be very early interest or may be an inquiry from the broker. Some of them may be prospect where we’ve actually exchanged terms and so even if it’s a big pipeline, it doesn’t necessary mean that there is a high probably than anyone of those deals will made. However, I would say that given that the space haven’t even be vacated yet and given the activity that we got in the pipeline. That remains very optimistic about our prospects in that building.

Jayson Lipsey

And we are also convinced of the right decision we get in.

Young Ku - Wells Fargo

Okay that’s helpful and somewhat related I know it’s still sometime away, but neighbors lease that expires late next year, how do you kind of that renewal or if they were to vacate what kind of backfill prospects are there?

Jim Heistand

Well, we remain in close contact with neighbors and we remained very aware kind of what’s their base needs are, our indications are that they still like the buildings completed the service that we are providing and I think that there is still prime decide exactly what their term leads are for a renewal and so we remained in conversation with them and when they are ready to engage, we’re available. The prospects for that space would be very similar to the prospects for 400 North Belt so in the submarket market again it’s a large user market and one-time a screen is among the very nicest buildings in the submarket so, even in a downsize scenario if you wouldn’t begin the role in terms of our ability to leave the space.

Young Ku - Wells Fargo

Okay so that neighbors lease, it looks like the increased trend is about little over $22 per square foot so, the market rent is closed to what 400 North Belt recommend?

Jim Heistand

The market, I would characterize the market rent for one-time screen as the few dollars higher than in 400 North Belt rent.

Young Ku - Wells Fargo

Got it, great, thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed with your question.

Rich Anderson - BMO Capital Markets

Hi, good morning folks.

Jim Heistand

Hi, Rich.

Rich Anderson - BMO Capital Markets

So, if you would take a stab at that guidance, would it have gone up or down considering you have an uptake in straight line rents, but also the back of the preferred redemption to curious what the real cash flow number might have gone this quarter.

Jim Heistand

I, we – we try not to get guidance on stab because it does very dramatically, I think under our base case kind of revised ’13 outlook it would go up slightly, but for me it hope it doesn’t and the good news about giving a lot of – lot more leasing then you anticipate and hopefully giving our occupancy target is that end more capital and that will impact our stab. So, if you look at double store, but right now given the preferred redemption is slightly larger portfolio, my self performance in the operational side of that stab should go up modestly from where we were end of the year.

Rich Anderson - BMO Capital Markets

Okay, yeah, a good sequential year from a leasing prospective relative to the fourth quarter, you didn’t changed your outlook for occupancy in your revised guidance, if you have another quarter and second quarter like that can you envision your willingness to raise your guidance for occupancy in the future.

Jim Heistand

I think absolutely we are always evaluating our guidance to ensure that is the best possible information that we can put out there. I think in the contacts of our occupancy specifically we are still expecting in the third quarter we are going to have a bump down.

Rich Anderson - BMO Capital Markets

Great.

Jim Heistand

It’s going to be this year with this, that’s going to contribute about a point of decline in our occupancy and I feel good about our prospects in the pipeline right now we’ve got a lot of executing the deal and so I think while we are optimistic we want to remain cautious knowing that’s coming in the third quarter and knowing that we’ve got a lot of way to jump.

David O’Reilly

Despite the one-time charge for paying off the deferred looking things obviously which is the right thing to do and we raise the chunk of equity in March I mean not for that we were increasing our guidance.

Rich Anderson – BMO Capital Markets

Great, got you. In terms of the Fund II strategy were these acquisitions or by out of interest kind of property specific or do you – is it a broader view about what you think might happen sooner or later with Fund II?

Jim Heistand

Well, I think I’ve always said that there are a number of assets in that portfolio the Parkway would like to own long-term it just so happen at that particular time to our partner at that one point in time was over allocated office and so we came up with pricing better work for us and work for them something that can be done quickly. So I can’t tell you exactly where that will go but we are constantly evaluating that with them until the extent they have an interest in selling office more company we would execute those again.

Rich Anderson – BMO Capital Markets

Okay last question is TPG if I’m doing my math right there were up 62% from the initial deal with you probably you didn’t expect that quick of return I mean I’m sure they are pleased but what do you have in your mind in terms of what their plan is what their timeframe is with Parkway?

Jim Heistand

I can tell you this right now basically Frank as we do there is an half a lot of rooms that run on a recovery on the asset that we’ve purchased in terms of creating additional value I have heard no suggestion at all that they are had interest in walking away from there investing into Parkway. So I think at this point in time they want us to continue to grow and there we been doing I have heard nothing to the contract.

Rich Anderson - BMO Capital Markets

Okay perfect. Thanks folks.

Jim Heistand

Alright.

David O’Reilly

Thank you.

Operator

Our last question comes from (indiscernible) Robert W. Baird. Please proceed with your question.

Unidentified Analyst

Hey good morning. I was wondering if you could provide additional color was it driving your interest in the photo market is it playing on the recovery housing market or there other industry (indiscernible)?

Jim Heistand

Well, at this time one macro thing we thought about I’m – I own portfolio within that market than in my private life. We do that market as if there was a very entry kind of a market in our market there would be, it’s got lot of the characteristics of the New York market now low controlling asset things like but if you had a very small amount of developable land. And also you’ve got a tremendous amount of residential and hotel related development which is basically suite of opportunities to build new buildings overtime new office building so with our view that the cost replaced assets in that market we’ll continue to increase and we think the ability to raise rents over time we’ll continue to increase substantially and it’s a bit difference in the rest of our markets in that regard and it is the gateway for South America and our macro view is that we’ll continue to grow and so we just like the dynamics the supply demand dynamics office in the market and so we would see and I think our view over time I really to have assets and each of those free submarkets within the South Florida market.

Unidentified Analyst

Great and…

Jim Heistand

The house and recovery obviously to important niche recovered dramatically as you know those condos are well built everybody thought we will take 20 years to absorb have all been the absorbed building new one and so the price of land there that has been taking out of the market for condo buy an office price the price per square foot has doubled in the last two years.

Unidentified Analyst

Okay appreciate the color on that. And just one housekeeping item looks like the management net income actually negative in the quarter though the guidance for that item increased 500,000 at the midpoint. Was there a one time item in that number is there something I had missing?

David O’Reilly

No, I think you might be looking at our consolidated income statement.

Unidentified Analyst

Okay.

David O’Reilly

And to take the proxy for the management company profitability that the (indiscernible) numbers.

Unidentified Analyst

Okay.

David O’Reilly

Which I think is still that over 1.7 million positive and that increase our guidance will be around third-party management contract in Atlanta for CW Capital’s special service there that will hope drive some additional revenue in income through the management company. With that said, as we said over a year ago on this call that our management company well important and third party business well important we will continue to stick around, but it will becoming shrinking and owner of the business and I think has a performance of our EBITDA this past quarter in the past 6.5% that will continue to decline as we get a full quarter of VM in the portfolio we had LNR and U.S. Airways that NOI acquisitions the component of our EBITDA that is supported by the third-party business continued to go down from almost 15% a little over a year ago to 7% seven today.

Unidentified Analyst

Okay, was that the bigger target?

Jim Heistand

Yeah, the mid down the well 1.3 million square feet.

Unidentified Analyst

Okay perfect. That’s all from me. Thank you.

Operator

Thank you. Now I would like to turn the floor back over to management for closing remarks.

Jeremy Dorsett - Executive Vice President and General Counsel

Yes, well first I do want to thank the whole team of Parkway I mean there is been a half of lot of work done by all the employees in Parkway over the last 17 months I have been here the number of transactions dispositions acquisitions transformation strategy implementation it’s been huge everybody in this organization has work extremely to get where we are and I want to thank for doing that and also thank everybody on the call for their support and participation. Thank you.

Operator

Thank you. Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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