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Parkway Properties, Inc. (NYSE:PKY)

Q1 2010 Earnings Conference Call

May 4, 2010 11:00 AM ET

Executives

Sarah Clark – IR

Steve Rogers – CEO

Will Flatt – COO

Mandy Pope – Chief Investment Officer

Jim Ingram – Chief Investment Officer

Analysts

Jordan Sadler – KeyBanc Capital Markets

Brendan Maiorana – Wells Fargo

Michael Bilerman – Citigroup

Ross Nussbaum – UBS

Mitch Germain – JMP Securities

Dan Donlan – Janney Montgomery Scott

Rich Anderson – BMO Capital Markets

John Guinee – Stifel Nicolaus

Operator

Good day everyone and welcome to the Parkway Properties First Quarter Earnings Conference call. Today’s call is being recorded. With us today are Chief Executive Officer, Mr. Steve Rogers, Chief Financial Officer, Mr. Richard Hickson; Chief Operating Officer, Mr. Will Flatt; Chief Investment Officer, Ms. Mandy Pope; Chief Investment Officer Mr. Jim Ingram and Ms. Sarah Clark, Investor Relations. At this time, I would like to turn the conference over to Ms. Sarah Clark. Please go ahead.

Sarah Clark

Thank you. Good morning everyone and welcome to Parkway’s 2010 first quarter conference call. Before we get started with this morning’s presentation, I would like to direct you to our website at www.pky.com where you can find a printable version of today’s presentation. On our website you will also find copies of our earnings press release from May 3 and a supplemental information package for the first quarter. Both of which include a reconciliation of non-GAAP measures that will be discussed today to the most directly comparable GAAP financial measures.

Certain statements contained in this presentation that are not in the present tense are that discuss the Company’s expectations are forward-looking statements within the meaning of the Federal Securities Laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that these expectations will be achieved.

Please see the forward-looking statements disclaimer in Parkway’s press release for factors that could cause material differences between forward-looking statements and actual results.

At this time I would like to turn the call over to Steve.

Steve Rogers

Thanks Sarah and good morning and thank you for joining us today. I’d like to start with an update on where we are in the cycle as that will drive most of the strategic and operational decisions made at Parkway. On page two of our web presentation, you will see the cycle chart we have shared with your before and we continue to agree with where it indicates we are in the real estate cycle.

As we focus on the fund with Texas Teachers, I would specifically like to note the blue bars in the chart which represents a year-over-year change in office property values. Based on these projections the majority of the value decline in the office sector is already occurred and should lead the opportunities over the next 12 to 24 months to invest in highly accretive office assets.

The same fact set that gives rise to lower rents and increased leasing calls during this point in a recession also provides the greatest opportunities in investment front coming out of it. History and experience have shown that occupancy growth will follow job growth which will allow the market to increase rents and result in a growing NOI.

On page three of the web presentation, you will see an analysis published by calculated risk which shows the percent of job losses of all recessions since World War II and the length of time it took for employment to fully recover. The red line in the chart indicates our current recession. Assuming we have a gradual recovery similar in 1990 and the 2001 recessions, it could take a while for employment to recover.

All things considered we believe we bottomed out in have aligned our strategic and operational decisions according to this belief. On the operational front, we are allocating capital to leases that create highest net present value for the company. We are also proactively addressing our lease roll over exposure for the next few years to mitigate risk and maintain occupancy, sometimes at a higher cost.

On the investment front, our acquisition pipeline has grown to its largest size in our two years and we’ve made numerous offers over the past few months. However the investment climate is still uncertain. One of my favorite brokers in Houston Danny Miller is fond of saying there is lot of activity in the trophy department and the train wreck department but not much in between.

Parkway is looking for those treasures in between. Cap rates for these properties have a very wide range, cap rate between 8 and 10%. Even on the low sides, spreads to fixed rate non-recourse mortgages are at a historical high. In March we announced our newest plan known as FOCUS in our 2009 annual report. We have also provided a summary of the main objectives of the plan on pages four and five of the web presentation. The FOCUS plan is centered on accomplishing specific actions which will contribute to our overall goal of delivering a 12% annual compounded total return to our shareholders over a three year period.

As typical with Parkway’s prior plans, the name is an acronym that details the actions we are currently taking and expect to take during the plan which will began in July 1, 2010 and extend three full years until June 30, 2013. Let me take a minute and walk you through some of the details of the plans. Most of which we have given you in the past 15 months is various calls.

The F in FOCUS stands for Fund and fund like discretionary investments. We view fund investments as the highest priority of our 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. We are now ready to take advantage of investment opportunities through our $750 million fund with Texas Teachers. The O in FOCUS stands for full transition to an operator owner. With the goal of being a majority operator owner by the end of the plan.

This plan has started with investments in various joint venture structures and progressed with the implementation of our discretionary bonds. It is complemented by our efforts to maintain third-party management leasing contracts for the properties we sell as well as obtain new third-party business through the expansion of Parkway Realty Services. We were able to execute on this plan recently by maintaining the management contract at One Park Ten in Houston, which we sold in April. By the end of the plan we expect over 50% of our assets under management to be in fund life for third-party structures.

The C stands for capital allocation discipline. This is a twofold strategy that refers to the balance sheet strength as well as allocation of investment capital. Our overall capital structure goes to achieve a debt to gross asset value ratio of approximately 50% and a debt-to-EBITDA multiple of 6.5 times or less. Beyond the balance sheet, capital allocation refers to the goal of exiting non-strategic markets and sell properties that no longer meet our acquisition criteria and core markets through the continuation of our recycling program.

Proceeds will be invested in larger newer properties located in larger markets that have higher rent growth, potential through the fund or fund like structure. The U in FOCUS stands for uncompromising focus on operations. We believe this is what sets Parkway apart from other office owners. One important component in this area of the FOCUS plan is to move more decision making authority to the regional office level. Our market leaders already have the responsibility of setting rents, increasing NOI margins and maintaining a consistent standard of operations and they will be given more profit and loss responsibility and investment authority going forward.

It is very important that we know our market, which is best achieved when our people live and work within the markets. In addition to being good real estate managers, we also must have a deep understanding of the history, economics, infrastructure and politics as much more. And finally the S in FOCUS stands for shareholder returns. All the previously mentioned goals funnel to the ultimate goal of the FOCUS plan to maximize total return to our shareholder.

We’ve set a goal of achieving 12% annual compound of total return to the shareholders for the next three year period beginning July 1. Real estate total returns as measured by NAREIT and the leveraged NCREIF returns have averaged about nine to 10% per annum over the past 30 years. In choosing 12%, we are setting a half hurdle and aligning ourselves with what matters most to our shareholders which is total return.

I would like to add that it’s a not comp plan, as no value has been established here, however we anticipate tying management to the goals of the plan, not only for the absolute 12% goal but also on a relative return goal compared to a relevant public real estate index. We’ll provide more details on our first quarter results later in the call, but in summary we had a good quarter with FFO, recurring FFO, FAD and same store NOI each exceeding our internal budget.

As we stated in our press release yesterday the company has received notice of a compliant the occupational safety and health administration initiated our former CFO. We firmly believe these claims are without basis and will be aggressively defend the company and our good reputation that we work so diligently to establish and maintain for over 30 years.

We believe the final outcome of the compliant will now have a material adverse affect on the company’s financial statements and the company carries adequate amounts of applicable insurance to cover such employment disputes if necessary.

With that I’d now like to turn the call over to Will.

Will Flatt

Thank you, Steve. We continued to see signs pointing to the bottom of the recession nationally and for Parkway and the start of our recovery phase. Sub lease levels have fallen for the second consecutive quarter and national vacancy continues to rise but at a much slower pace. Additionally the pace of defaulting customers have slowed as evidenced by 21% reduction in Parkway’s share of bad debt expense this quarter versus first quarter of 2009.

Considering Parkway’s markets, Houston, our second largest market appears to be showing the most signs of stabilization with an unemployment rate holding steady at 8.5% well below the national average of 9.7%. We are currently 92% occupied in Houston as compared to a market occupancy of 82%. Atlanta unemployment rates have shown improvements since the beginning of the year, but still remain at a historically high level of 10.4%. Market vacancy rose in Atlanta during the first quarter to approximately 23%, partly driven by the addition of 1.6 million square feet of new construction which was largely unleashed.

Chicago was also experiencing a lack of demand with the unemployment rate rising remains slightly above a 11% leading to another quarter of decreasing market rents and occupancy rates, however Chicago’s CBD direct vacancy increased only slightly to 15% and is showing signs of leveling and sub lease availability dropped in both CBD and sub urban Chicago, another positive indicator that the Chicago market is starting to bottom.

Digging into Parkway’s numbers we believe our occupancy bottomed out in the first quarter and we will see gradual improvement going forward. We believe the majority of significant blends and extends are now behind us which significantly reduce on lease rollover exposure for the next several years, however there is still work to be done. I’d like to direct you to the charts shown on page 19 of the web presentation which shows the status of all of our major leases that expire in the next three years.

This chart includes individual customers that are 50,000 square feet or greater. Particular note is the amount of lease that we’ve already completed since early 2009. In January we signed a lease with combined insurance which back fill nearly all of Federal Home Loan Bank space in Chicago. We have recently received signatures for new lease totaling 56,000 square feet in Columbia, South Carolina which has taken a large portion of the space being vacated by the McNair Law Firm. Also we signed a direct lease with Digital Risk for 57,000 square feet in Orlando which absorbs the majority of the space being vacated by Charles Schwab.

We also completed an early renewal with Forman Perry in Jackson, Mississippi which is we mentioned in March press release was completed with no capital cost. In summary, we are systematically renewing or placing a number of large customers and positioning the portfolio for the recovery. Last quarter we had five major lease explorations in 2010 and today we only have one.

With 2010 largely put to bed, we were focused on 2011 where the biggest exposure is AutoTrader in Atlanta. We are already actively pursuing options for this phase including the possibility of converting the property to medical office use due to its proximity to several major hospitals in the central perimeter area as well as other traditional office prospects.

Occupancy as of April 1, 2010 was 85.6% down from 87% as of January 1. Nearly a point of this decline is the result of our taking back space on a temporary basis during the construction period for combined insurance, a 99,000 square foot customer at 111 East Wacker. This was discussed at length last quarter and was included in our 2010 budget and guidance. This lease in conjunction with the similar take back of 33,000 square feet also 111 East Wacker for the temporary construction of space for Silliker also had a negative impact in our customer attention for the quarter which had 57% as well below our ten year historical average of 70%.

Not including these two leases our customer attention for the quarter would be have 69%, Silliker took occupancy on April 1 and combined insurance will take occupancy on July 15. During the first quarter, we completed 65,000 square feet of new leasing, 49,000 square feet of expansions and 454,000 square feet of renewal leasing. The average rental rate for new leases was $19.86 at a cost of $3.80 per square foot per year and the average rate per renewals and expansions was $19.01 at a cost of a $1.10 per square foot per year.

So average leasing rates were slightly down this quarter as compared to last quarter, the leasing cost per square foot per year to complete these leases, we’re at the lowest level they’ve been in over year and well below our average leasing cost over the past five years as noted on page 17 of our web presentation.

Our same store average ramp for the quarter increased 0.7% to $23 per square foot. Our internal projections that we are on track to meet our occupancy budget for the year and we would reaffirm our 2010 guidance for average same store occupancy of 85 to 87%. Please note the leasing status report shown in the supplemental package on page 24, which less leases that have signed but have not occupied the space and we’ll commence paying rent in the next quarters.

As of April 10, the portfolio was 86.7% leased. Sub sequent to quarter end, for the month of April, leasing activity includes 97,000 square feet of new leases and expanse leases including the lease in Columbia, South Carolina. Our occupancy as of May 1 increased from April 1 to 85.8%.

I’d now like to turn it to Mandy for an update on our financial results.

Mandy Pope

Thanks Will. Fort the first quarter 2010, we reported total FFO of $0.92 per share which includes $0.27 per share in non-recurring lease termination fees related primarily to the early termination of Federal Home Loan Bank and Blue Cross Blue Shield in Chicago which was disclosed last quarter. Additionally our G&A expenses for this quarter include 525,000 related to the anticipated insurance deductible to defend the claims that have recently been made by our former CFO.

Adjusting for non-recurring items recurring FFO for the quarter was $0.68 per share which exceeded our internal budget. A reconciliation of reported FFO to recurring FFO as well as Parkway’s definition of recurring FFO is shown in the web presentation on page 21. Parkway’s share of reported same store NOI increased $5 million or 17.8% for the quarter and was primarily due to an increase in lease term fee. Excluding non-recurring lease term fees, same store NOI for the quarter decreased 803,000 or 2.9% as compared to last year on a GAAP basis and decreased 987,000 or 3.6% as compared to last year on a cash basis.

This decrease is primarily due to a decrease in rental income associated with rent concessions. Our internal projections indicate that we are in line with our budget we reaffirm our 2010 guidance for our reported FFO range of 272 to 292 per share and a recurring FFO range of 240 to 260 per share. Our FAD for the quarter was $14 million or $0.65 per share. As our remainder our FAD reflects the actual dollars incurred for recurring capital expenditures including building improvements and leasing costs and by nature it may vary significantly from quarter-to-quarter.

Parkway’s share of recurring CapEx in the first quarter totaled $4.6 million which is lower than we anticipated. Based on our estimates of incremental leasing activity we are expecting higher CapEx in future quarters, therefore we reiterate our guidance of $38 million to $43 million for Parkway’s share of recurring CapEx for 2010. This range includes approximately $10 million of high – $10 million of high and unusual leasing cost for the two 11 year leases signed in Chicago.

If you were to remove these costs, the CapEx range would be 28 to $33 million. At March 31, we had $737 million in proportionate debt including our line of credit balance of $126 million. As announced last quarter, we completed a $35 million non re-coursed fixed rate first mortgage loan related to the refinance of our $60 million Capital City Plaza mortgage which was scheduled to mature in May 2010.

The company uses to existing line of credit to pay the $25 million difference on the maturing loan. At March 31, we had $64 million in remaining mortgage debt maturities for 2010. Subsequent to March 31, the company paid off a $17.2 million mortgage note payable utilizing its line of credit.

This mortgage was secured by two office properties in Houston, Texas and one office property in Atlanta, Georgia and had an interest rate of 5.3% and was scheduled to mature on May 1, 2010. In the second quarter of 2010, the company expects to place $23 million ten year non re-course first mortgage with a fixed interest rate of 6.3% secured by the Citrus Center office property in Orlando, Florida. Citrus Center is unencumbered and the proceeds will be used to reduce the line of credit. Consistent with year-to-date activity we intent to find the remaining 2010 maturities through a combination of refinancing of existing mortgage debt and the placement of new mortgage debt with total expected debt financing proceeds in the range of $65 million to $70 million which includes the Citrus Center mortgage proceeds.

We are seeing a large number of competitive quotes from the debt markets at favorable interest rates which are also better than our 2010 budget of 7.25%. We are currently seeing mortgage rates ranging from $0.625 to six and three quarters per cent for our existing office product at 60% to 65% leverage and we expect to see mortgage rates in the range of five and three quarters to 6.5% for Texas Fund acquisition at 50% leverage.

Our balance sheet remains solid with the debt-to-EBITDA multiple of 6.2 times for the quarter which is lower this quarter due to the lease termination fees received. Absent the first quarter non-recurring fees, the EBITDA multiple is still strong at 6.5 times, which is slightly better than our peer group. Our debt-to-growth asset value is estimated at 56% which is higher than our goal of 50%.

In discussing the funding of the company is a $112.5 million equity investment in Texas Fund II. We remind everyone that given our discretionary fund structure for every $100 million purchased, we only need $15 million in equity. There are several options available to the company to fund its share of equity for this fund as outlined on page 15 of the web presentation.

The recent dividend reduction provides an additional $22 million per year in available capital, some of which would be available to use towards these new investments. Additional sources of capital are planned assets sales and common equity issue through the $75 million ATM program put into place in December 2009. Recently, the preferred equity market has been opening up and we view this as another source of fund.

Having these additional funding options, gives the company balance sheet flexibility and capital available to act on accretive investment opportunity.

With that, I will turn the call over to Steve.

Steven Rogers

Thanks Mandy. First, I would like to take a moment to extend my deepest gratitude and appreciation to Mandy Pope for all the great work and leadership she has provided as the Interim CFO and to congratulate here on the expanded role of Chief Accounting Officer, which will bring the important roles of Investor Relations and Corporate Governance under her tutelage.

Second, let me welcome our new CFO, Richard Hickson to the position. Richard’s announcement last week speaks for itself and we are excited to have a person of his talent, experience, and integrity leading our finance and accounting group. I am a very fortunate CEO to have a CFO and a CAO with the depth and range of experience they have in addition to just being darn likeable folks.

Before moving on to Q&A, I would like to remind you of two important upcoming events at Parkway. First, our Annual Shareholders Meeting will be held at Morgan Keegan Tower in Downtown Memphis this year on May 13th at 2 PM Central. Second, we would like to invite you to join us in Chicago during NAREIT REIT Week for FOCUS on Chicago, Building a Better Parkway. We will have a reception and property to our highlighting our Chicago CBD assets on June 9th at 5 PM Central Time.

You should have already received the save the date invitation for this event, but in the events you have not, please contact Thomas Blalock and we hope to you see all there.

And with that, we will be happy to answer any questions you may have at this time.

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Thanks and good morning.

Steven Rogers

Good morning, Jordan.

Jordan Sadler – KeyBanc Capital Markets

Will, I wanted to just come back to one of your comments regarding occupancy and I know this is not necessarily new information, I think we touched on this last quarter. But you said you think 1Q will represent the trough at least for 2010. I was thinking – I was getting curious if you could expand on that a little bit. Do you think will be the trough of the cycle for Parkway? Just looking forward to the 2011 rollover exposure, and maybe if you could give us the context for what you think will happen. I know you don’t have a crystal ball, but what you think will happen occupancy-wise across the portfolio as we look out ‘12 to ‘18.

Will Flatt

It certainly is a trough for 2010. And we are systematically mitigating the big roles in 2011. If you look at page 19 on the web presentation and all of those are in various status of either good progress or we know their outcome. And I think the biggest risk Jordan is going to be AutoTrader in Atlanta.

And so what I think was positive in our favor as we have very large rollover left in 2010, so I feel comfortable about calling the bottom for 2010 and seeing incremental improvement going forward, the question of bottom for the cycle and 2011 will be how much progress we make on AutoTrader quite honestly and in terms of either we have got good prospects out there for a portion of the space. It’s got high demand for medical office use. And so that is really the February of 2011, the big challenge that we have got.

Jordan Sadler – KeyBanc Capital Markets

Okay, then shifting gears to the acquisition side. Steve, you touched on it. Investment activity, couple year high in terms of what you are seeing. You are looking for something in the sweet spot. Maybe just expand on what you are seeing what if you think we are getting closer to you guys, actually closing on a transaction the near term. Where have you been in the bidding? And why wouldn’t you look at some train wrecks?

Steven Rogers

Okay. We have been making – let me go back to 2009 and maybe put it in perspective. I think in all of our meetings and conference calls in ‘09, we stated that we were not going to buy anything principally, because of just the great uncertainty of where we solve the cycle. And quite frankly, just not much was coming out due to most of the lenders going to the blend and pretend program.

We are now seeing the evolution of the blend and pretend program. And people are indeed putting stuff out. We are seeing more foreclosure notices, we are seeing more CMBS special servicer activity. HFF, a company we use a lot, they have got about 700 broker opinions of our view going through the system right now, up from a probably 15 in the prior year put it in perspective.

And all of that activity, Jordan, we are actually seeing now where people would not return our phone calls or were somewhat cavalier about their position, our phone calls are now being returned. We are talking to a lot of people directly. You noticed all of the private companies that have been talking about running an IPO out the door. Some of those are realizing they may not be able to make an IPO and need to make some sales as there are various states of just repair with their mortgage debt.

So all of that I believe is bodes very well for our program. The last bid that we made on a downtown building in Orlando, I don’t know if we can go into the details of it, but we were a non-cap bidder, probably is traded a little below that on a high-quality asset about $52 million to an overseas investors.

In other words, we are getting beat on some bids right now, but we are getting beat very slightly, which leads me to believe two things. The more bids that we are making typically like any prospecting pyramid, the more offers you make, the more opportunities you have to make something.

Our historical hit rate has been around 10% or 11%, so you got have about 10 or 20 things in the hopper to make one or two work out. We have got at least that much in the hopper and nothing under contract today, but activity leads to activity.

So I think that’s most of the question. Maybe the last part was why not train wrecks. We would define a train wreck is something that just wouldn’t fit Parkway. If it’s a train wreck on the debt, we are perfectly willing to take on a capital structure train wreck. But if it is a Class C minus building, 40 miles south of Houston, that’s a lot different than you a good B plus, A minus property in the Galleria area like we are bidding on now that would be a good fit with Parkway.

So we are trying to find those treasures in between Jordan that are starting to come to us and when they are not coming to us, we are taking a proactive approach of actively going out and offering to private company owners that are owned more and more properties.

Jordan Sadler – KeyBanc Capital Markets

You are not afraid of lease-up risk?

Steven Rogers

No sir, we have certain de minimis standards on lease-up risk. The percentage –

Jim Ingram

We can buy assets that are 60% leased or greater for Texas Teachers. Jordan, this is Jim Ingram.

Steven Rogers

So in other words, 60% would be our threshold without having to go back and get any kind of an approval from our partners Jordan. And so I don’t see us dropping below that. I think quite frankly, we don’t think we need to right now. We still have some I would call it operational downside in this not just in PKY, but in everybody that’s out there.

I mean look at all the reports that have come out. They almost read like a – suburban guys read like a templates stacked on top of one another, down a 100 bps and down 10%, and that’s going to keep going on for a little while longer. And until that works its way out of the system, we really just don’t want to buy a lot of vacancy right now. I don’t think we have to.

Jordan Sadler – KeyBanc Capital Markets

Okay. Lastly, quick one on the OSHA complaint. Was there – and I guess a little bit of a separate matter. Was there – did Mitch receive any severance that recorded in the quarter? I am just not seeing that in the numbers or it’s not flagged.

Steven Rogers

Look, first of all, I will not be able to probably discuss today all of the things that you might ask me and frankly that I would probably like to say just simply due to the confidential nature of the OSHA process. But I can answer that question directly that he did not receive any severance and that the claims made are unfound and untrue and Parkway will vigorously defend its good reputation.

So I think the right channel for the overall disclosure on this matter is that process that OSHA has laid out for us. We will follow that process correctly and precisely. And after the investigation is resolved, that the claims that Collins is made and our response will be available to the public at anytime. We would welcome everyone’s access to its information in its entirety under the Freedom of Information Act.

Jordan Sadler – KeyBanc Capital Markets

Thank you.

Steven Rogers

Yes sir.

Operator

Thank you. We will go next to Brendan Maiorana with Wells Fargo.

Brendan Maiorana – Wells Fargo

Thanks, good morning. So just a quick point of clarification, I apologize if I missed this. Has the maximum liability related to the OSHA claim been reserved for in the quarter?

Steven Rogers

What we did in the first quarter Brendan is to reserve the amount of the insurance deductibles we have under our employment practices liability insurance, which is – we have a $2 million there and a $45,000 deductible, and then we have a $25 million D&O policy with a $500,000 deductible, and we felt like it was just a conservative step to go ahead and subtract that, reserve that in the first quarter which we have done and it’s already baked into the number now, kind of sunk cost. And we will just get on with business and get it into the insurance guys hand and let him go at it.

Brendan Maiorana – Wells Fargo

Right. So I mean for anything more from a PKY standpoint, financially it would have to be above your insurance limits, which it seems would be probably unlikely, I guess, just looking at –

Steven Rogers

Yes, sir. We believe that our exposure of the matter would be limited to the items that we have reserved for in the first quarter like it would certainly be some de minimis items outside of that and if we those, we will give them to you. But we have got good insurance and that’s how we have it for, because we don’t have many of these matters in our company, but from time-to-time someone makes a claim on us saying that’s why you have the insurance.

Brendan Maiorana – Wells Fargo

Sure, okay, thanks. So just in terms of your CapEx levels in the quarter were pretty low, but you are maintaining your guidance for the year. And if I look at the amount of the combined insurance, I think there is about $8 million left to spend on that, and you spent $5 million in the first quarter. So I guess that leaves you around – I think around $27 million-ish of CapEx to spend for the rest of the year outside of combined insurance. That seems like that is a pretty high number relative to the amount of leasing that I would think you need to do to hit your occupancy targets. Can you just sort of frame up how you are thinking about what you may spend on a dollar per square foot basis and sort of how much leasing activity you have got kind of baked into your expectations?

Mandy Pope

Sure, Brendan. Hi, this is Mandy, I will take part of that question and Will please jump in as you see fit. As we said, FAD will be lumpy through year. It’s based on the timing of the incurred capital expenditures. Combined insurance, we still need to spend those dollars. First quarter reflects very little of those dollars being spent, so you will see those amounts hit in the future quarters.

Again, it will be lumping, but lumpy based on some of the leasing activity that we are currently working on and Will will speak to that in a moment. I would say as far as cost per square foot, if you will look on page 17 of our web presentation, something new we added this time to help everyone with the information is to show our historical lease costs both in terms of dollar per square foot and term in the years for new and renewal expansion leases, and we expect those terms to mirror this historical numbers with new in the $4 to $4.50, $4.50 range and renewal on the $2.50-ish range. But Will did you have any –?

Will Flatt

I don’t have much to add. I think that as a global comment, we are seeing the bottoming on terms of big concession packages, it seems like landlords have started to push back on total free rend and total high TI packages, because they just cash payback of those that have gotten to be so long. I think that what Many covered is, that really covers it.

Brendan Maiorana – Wells Fargo

Okay.

Will Flatt

Unless there is a follow-up question.

Brendan Maiorana – Wells Fargo

So if I look at your guidance, excluding the kind of two large leases that you are talked about then, it kind of says that $28 million to $30 million is sort of a mid-cycle CapEx TI leasing cost estimate for your portfolio, mid-cycle?

Steve Rogers

Brendan, so I think you are right. I think we are – we would concur with that.

Will Flatt

I would – the only thing I would add is we are very happy to see directionally the cost per square foot come down. I certainly wouldn’t call that a run rate and that’s why I think Mandy is pointing back to our more historical averages is that that was heavily influenced by a large lease, Forman Perry, with no TI, and no commissions.

We have – it is a result of us being a little more selective on the deals that we are doing. We are making sure that we are putting, allocating capital to the highest and best use. And so there is some design in that number, but it is certainly a lower number on a cost per square foot basis than we will see going forward.

Brendan Maiorana – Wells Fargo

Sure. What do you think your mid-cycle occupancy level or target ought to be?

Will Flatt

In terms of where you think we will bounce back to once we recover?

Brendan Maiorana – Wells Fargo

Yes, just kind of a – if you look over a cycle where do you think your occupancy level will be? Just as you look at your portfolio as it stands today, where that number –?

Will Flatt

Certainly we won’t operate and historically we have operated north of 90 and believe that somewhere in that 90 to 93 range is a good stabilized occupancy for in just sort of assuming the 7% to 10% vacancy loss. I think as we sit here today, I mentioned that we incrementally ticked up to 85.8%. I

was remiss in not answering the question earlier to include 100,000 square feet is already signed, a 145,000 in total, but actually a 100,000 of it is combined insurance, which will come into the portfolio in July 15th. So in terms of being able to – hope to call a bottom and say there is some certainties to 2010, that is going to matriculate back into – back into the portfolio here very shortly. We are under construction today. It’s probably too early for me to pick a number today to be honestly with you.

Steven Rogers

I will give you a little bit of uptake on being here a very long time and the highest number we ever ran in the company’s history was 95.5% and the lowest number we have ever run in the company’s history was 85%. So what you are seeing I think is the effects of a good old-fashioned, real deep recession, characterized by a lot of job losses. And we not only see it in PKY’s number being at the very bottom of our wide range over the long period of time, we see it in the national average, plugging along a 20% vacant.

And quite frankly, we see it in the REIT index. So we follow up to a dozen office REITs every quarter just as a benchmark, and everybody is kind of dealing with the same kinds of issues is that occupancy has been under a good bit of pressure, but we are now feeling the bottom.

And most of my peers, the guys I talk to are feeling better about life, the job growth that came in March and we anticipate a job growth in April here are going to be contributors toward that page 2 cycle chart that we are talking about once we get the job growth back, occupancy is usually pretty good about following.

Brendan Maiorana – Wells Fargo

Sure, thanks for the background. And then just lastly, I am looking at page nine on your web presentation. And in there you have got a debt-to-gross asset value calculation and a target of 50%. As you migrate more towards an operator/owner and the fee income becomes a larger portion of your business, you are including that fee income in your NOI, but that is not really underpinned by assets. I mean, as you think about your debt-to-gross assets or debt-to-EBITDA, do you – would you consider stripping that out of your NOI line as a business line that you may not be able to lend against?

Steve Rogers

Well, it’s a good question. First, we don’t want to strip it out, because we do receive borrowing against it on our line of credits. And we intend to receive borrowing against it when we renew our line of credit which is coming up. And we are talking to lenders about the income more often now than ever. And of the nine lenders that participate in our buying plan and the five or so that are still would like to, most of them recognized that fee income can be capitalized at some level.

So we give you kind of two measures there Brendan, there is a 50% gross – debt-to-gross asset value and then we isolate on page nine, that portion that would be the fee, so that you can see it, because everybody may address this differently. And then we also like the debt-to-EBITDA multiple, because EBITDA does not subtract fees. Therefore, we actually like that as a measure, because the fee income is included there. And as you look at the focus strategy, you will see a lot of discussion in there with fund and fund-like investments, PRS income, it’s going to be a component of our recurring income going forward and I think it’s going to be a material component going forward and a valuable component going forward.

So I would like to keep it in there, I understand some do not capitalize it. we feel like that those recurring fees that are associated with the properties and run the length of the ownership in the properties should be capitalized at the same cap rate as the real property is capitalized at, and that nonrecurring fees which are more month to month, transaction oriented, we don’t give those that kind of cap rate and should be segregated and valued slightly differently.

Operator

Thank you all, next we have Michael Bilerman with Citigroup.

Michael Bilerman – Citigroup

Yes good morning, Josh Attie is on the phone with me as well. Can you just remind us why was Mitch terminated?

Steve Rogers

You know what we really had is, as we mentioned in the February call and we were noticeably succinct in our call as we just didn’t have a good cultural fit there and I just feel like it’s best to leave it at that. While I might wish to go into further disclosure I have to respect what’s taking place here with the OSHA claim and therefore would really hold off on any further discussion on that Josh until really we have the authority to really discuss that in greater deal.

Michael Bilerman – Citigroup

Sure and it’s actually Michael speaking. What is exactly the OSHA process that’s going to happen?

Steve Rogers

Now we have a certain rebuttal period that we are working on right now and our team is making a very, very detailed thorough factual and revealing disclosure on this matter. I personally reviewed it as well as our Audit Committee and our team and that rebuttal will go into OSHA’s hand I believe early next week; I think the deadline is May 13th. At that point in time, OSHA will take our very detailed and thorough disclosure and bring probably each party in and visit with us face to face and evaluate the matter and then they have a certain process after that if the claim goes any further then there’ll be certain things they need to do and then we will need to make an additional response to or so forth.

Michael Bilerman – Citigroup

Can you at least share with us at least the area of the claim? I assume this is not an occupational health and safety type matter like slipping and falling at the office or things of that nature so can you at least give us a flavor of where, what exactly the claim surrounds, at the least area, the discipline?

Steve Rogers

OSHA was deemed up to the place where – when Congress created the Sarbanes-Oxley Act, they gave it over to OSHA to administer and so anytime you have something under SOX they need to go OSHA. So it’s not a hard hat – stiletto shoes, slip and fall kinds of issues, it would be more in the area of Sarbanes Oxley related and so when someone makes any kind of claim about nature how broadly it could be, then they could go under the OSHA claim, Mandy?

Mandy Pope

This is Mandy and I’d like to add that no one worked more closely with Mr. Collins on the financial statements and forward-looking projections than me and at no time did he express any disagreements to me on a historical or forward-looking statements that we released to the public.

Additionally, he never expressed any disagreement to our final statements to our auditors KPMG prior to his departure. He certified the historical financial statements each quarter he was here at Parkway and he actually certified to me personally on the 4Q 2009 as well as for the 2010 earnings outlook. So we believe his claims are unfounded, the facts are clearly on our side in this matter and we will defend this claim vigorously.

Michael Bilerman – Citigroup

But I guess on the last call Mitch you are, I’m sorry not Mitch, Steve you were very clear to say that there was zero, there was no disagreement whatsoever regarding the financials because his termination came at a time where you decreased guidance significantly, significantly slashed the dividend and he openly did not sign off in the financials in the 10-K, so I guess reading into that, there was a disagreement and those statements were not true.

Steve Rogers

Yes now the statements were true, let’s make sure we’re very clear. What I said to you is Mr. Collins did not express any disagreement to me, Mandy, the Audit Committee, KPMG, our auditors and all other directors and managers. That is a true statement. Any disagreements that have arisen since his departure have been post termination inventions.

Michael Bilerman – Citigroup

So this is a post termination claim.

Steve Rogers

Post termination inventions.

Michael Bilerman – Citigroup

Okay and the claim, does it exceed $25 million in total or it would be under 25 in which case all you are liable is the deductible and any other sort of legal fees and time.

Steve Rogers

The claim has no value. Very few OSHA claims ever really survive, but if they do survive then they’re valued at some point in time based on somebody possibly wanting to be reinstated into their prior employment and therefore we have no value on the claim at this time. We just think that maybe adequate reserves based on just good common sense and our business judgment of that or matters that’s similar to this and so forth.

Mandy Pope

I would add too that the reserves were made in the event that insurance is needed on this matter. So we believe right now that is our maximum exposure. Regarding the 10-K, we do have an audit opinion from KPMG, they’re very well aware of this OSHA claim and they have issued an audit opinion on our 10-K.

Michael Bilerman – Citigroup

Okay. Just going to lease term fees I think you talked about that there was $0.32 of nonrecurring lease term fees in guidance, you had about a million which you deemed recurring, can you just outline what’s embedded in guidance for recurring and nonrecurring lease termination fees.

Mandy Pope

Sure, there is an additional $1.2 million embedded in the nonrecurring lease termination fees for fourth quarter 2010 and that relates to Blue Cross Blue Shield 168,000 square feet at 111 East Wacker in Chicago. In the event we receive notification from them in the fourth quarter that they want to exercise an early termination option that would be effective March of 2012, this would be the amount of lease termination fee that we would recognize in 2010.

Now we would love not to get that notice and to remove this $1.2 million from our nonrecurring lease termination fee, but for now we have included that in our nonrecurring lease termination fee guidance.

Michael Bilerman – Citigroup

And there was a million that you deemed recurring this quarter?

Mandy Pope

That’s correct. If you look to page 21, we’ve provided a disclosure in our web presentation for recurring FFO. The lease termination fees that we included in recurring FFO reflects the revenue stream for the Federal home loan bank space without any interruption due to the temporary construction period to accommodate combined insurance. This is consistent with the approach we used in providing our 2010 earnings outlook and it’s $0.05 per share. We disclosed the amount so that everyone treats it as they see fit. We felt it was important to be consistent with the manner in which we provided our earnings outlook.

Michael Bilerman – Citigroup

And that continues through the rest of the year?

Mandy Pope

No that’s just this quarter.

Michael Bilerman – Citigroup

Just this quarter. And there’s no other recurring lease termination fees in guidance for the rest of the year?

Mandy Pope

That is correct, no other recurring.

Michael Bilerman – Citigroup

And then Steve, can you talk a little bit about the acquisition market? You had some commentary looking at this Orlando asset. What are you looking at relative to the fund versus on balance sheet?

Steve Rogers

Well everything that we’re looking at right now would be funds and that is persistent. We believe the funds are highest way to utilize capital because we achieve a higher rate of return there. So everything you see would typically go to the fund. Go ahead.

Michael Bilerman – Citigroup

Or you can say how big – you said you were looking at 15-20 different opportunities hoping to get a 10% hit rate, so get one or two in the door. What is the total size of those 15-20 opportunities that you’re looking at?

Steve Rogers

Well, it might be a little misleading but I’ll go ahead and answer your question. It’s in the billions but that’s just because there’s a couple on their portfolios as we articulated a couple of times of recent. There are a few private office owners in the southeast and southwest that have expressed interest in going public and they may not make it through the gate and they’re going to need to do something and so we’re visiting with those. But if you sort of took those away from the equation, you would be looking at assets in the size of around $40-$60 million per asset would be the sweat spot that we’re seeing out there today. Those assets would typically be somewhere in the $150 a square foot range, so there’s several 100,000 square foot, 10-15 storey office buildings, CBD, some suburban in the cities that, which were already invested in and already have good teams in place.

Michael Bilerman – Citigroup

And you think about the private portfolios that would be a stock deal on balance sheet or you would try to figure out a way to get more money from Texas Teachers.

Steve Rogers

Most everything that we’re looking out there would be either a major piece of a portfolio or the size of the portfolio would be within the constraints of the $750 million fund.

Michael Bilerman – Citigroup

Okay great, thank you very much.

Steve Rogers

Thank you.

Operator

Yes, we’ll take our next question from Ross Nussbaum with UBS.

Ross Nussbaum – UBS

Hi good morning.

Steve Rogers

Good morning, Ross.

Mandy Pope

Morning.

Ross Nussbaum – UBS

I’m trying to understand the focus plan a bit more and I think there’s two elements to it that I’m struggling with a little. One is where you state that your goal is to be a majority operator owner at the end of the plan and when I see that on paper it reads to me that your intent is to have a larger share of your assets whether that’s designed by earnings, NOI or square footage in joint ventures than wholly-owned, is that correct?

Steve Rogers

I would add that it’s in discretionary funds or fund like structures Ross and not joint ventures. I know, I try to make a very finite distinction between the two because a joint venture gives your joint venture partner all the discretion, of when to sell, when to capitalize, you have to go to him for money. For a discretionary fund like we currently have with Ohio PERS or with Texas Teachers allows Parkway the freedom to make the purchases within our defined box and they have the authority to make all the operating decisions for a very long term recurring period. So with that caveat yes what you stated is true.

Ross Nussbaum – UBS

So how do you get there because I’m looking at the portfolio today, 90% of your revenues are from wholly-owned assets. To be able to accomplish that plan within three years would seem to me to be a Herculean effort that would combine not only a massive amount of investment activity but also significant sale of a good deal of your wholly-owned assets.

Steve Rogers

Well I think the definition maybe different, now here it’s asset under management and right now we have $500 million in the Ohio PERS so you need to count that Ross and if you take that and add to it $750 million in Texas Teachers, just those two alone without me getting in all the other little smaller partnerships we have, that would be $1.25 billion and currently have less than $2 billion under – assets under management today, so it would render us majority operator owner under that definition.

Ross Nussbaum – UBS

So you’re doing it by total asset size not your pro rata earnings from those assets.

Steve Rogers

And that’s what I think we’ve consistently defined that and I’m sorry if I haven’t been clear on that in the past, assets under management just like in our annual report.

Ross Nussbaum – UBS

Okay number two you are talking about exiting nonstrategic markets, what are those markets?

Steve Rogers

What we’ve said is – there are about four or five markets in Parkway today that we do not think fit with our long term strategic goals under focus and we’re currently working on sales in those markets as we speak. Then there’s also a couple of assets in cities that we decided to stay in, for instance (inaudible) Houston where the asset itself no longer fits with what we’re looking for. And so we’ve been averaging about $65 million per year for the past five or six years of working towards that goal. This year we’re a little lag, we’ve only done about 15, but the year is still young.

What we would like to do is take a look at markets that show better NOI growth in our portfolios where we’d like to redeploy that money so it means Virginia Beach and Richmond, we would come out of Columbia, South Carolina or our headquarters in Jackson, Mississippi. We don’t intend to sell because we use Jackson mostly as a training ground for our people. We would like to migrate these assets into a fund-like structure so that our equity exposure in the smaller market is just that much less. So what you’d see is Columbia. We’ve gotten out of Winston, Salem, North Carolina and then a couple of years before that we got out of Knoxville, Tennessee so I think we’ve made good strides in this area but we still have a few more markets to go and during the focus plan we hope to go ahead and complete that activity.

Ross Nussbaum – UBS

So just to be clear, which markets are those?

Steve Rogers

Yes that’s all Virginia Beach in Virginia, that’s Richmond, Virginia; that is Columbia, South Carolina; Fort Lauderdale, Florida and in selling interest in Jackson, Mississippi where we’re currently headquartered. We don’t intend to get out of the city but to reduce the exposure as we’ve done already on two completed sales here when we sold an 80% interest to a local syndication and basically have no basis in the properties and we use them as a training ground and we receive cash flow.

Ross Nussbaum – UBS

With respect to the 12% annual compound total return that you’re targeting, how much of that you envision coming from the dividend?

Steve Rogers

Well right now we’re only projecting the amount of dividend that we’re currently paying coming from it. It would make me a very happy person to be able to change that upward and historically as Parkway has been at the bottom of cycles we’ve (inaudible) very lowest dividend. If you look back in early 90s we had a very dividend, at the lowest point of the cycle and they were able to increase dividend as we’ve come out of that. However, we’re only leaving that portion that’s currently the dividend today for the purposes of this discussion so that’s $0.30 a share per annum.

Ross Nussbaum – UBS

What can you tell shareholders from a big picture perspective about your components and achieving a 36% total return for them over the next three years when the stock is trading 20%-30% below where it did near 15 years ago and we heard a lot of talk about shifting to being an owner operator over the last X number of years I just – I don’t know if I see anything new in the focus plan so why is that going to result in such a stronger total return than what may have been historically achieved at Parkway and in terms of what NCREIF returns would suggest?

Steve Rogers

If you look back up to April of 1993 when we sort of came out of the last recession, Parkway has achieved a 14% total compounded return to its shareholders from 1993 to today. That compares to a NARIET of about 8.5 and NCREIF of about 8 and S&P 500 720 okay. The reason I go back to that date a) is I kind of benchmark on that day because I became President then and also that was coming out of the last recession.

The last few years have been pretty (inaudible) and as I speak to our shareholders one-on-one eyeball-to-eyeball as I do often and have been out for a long time what we’re saying to them is that historically REITs have produced about a 10% rate of return that’s over 5, 10, 15, 20, 25 and 30 years ago (inaudible) sitting in here in front of me and the highest five year period was 10.2% and all we’re saying is that we believe we can do 12% based on a couple of things. We’re going to delever the company as we’ve been systematically doing over the last couple of years and once we kick in Texas it has additional accretion per share. And if you take the accretion per share from Texas and the other things that we’re doing then you have a higher FFO and a higher FAD and a lower debt to GAB and a lower debt to EBITDA, which we believe will result in a better multiple of better valuation and that’s what we’re submitting ourselves to our shareholders for the record.

Ross Nussbaum – UBS

Thank you.

Operator

Thanks. We’ll go next to Mitch Germain with JMP Securities.

Mitch Germain – JMP Securities

Good afternoon, Steve if I look at your web presentation on page two the PPR chart, it’s estimating rent growth 2012-2013 is that consistent with how you’re underwriting properties for your acquisitions.

Steve Rogers

It is – one of the things that we want to make sure that everyone realizes is this not only a blue bar value chart but it’s also a purple bar NOI and rent chart and I think that’s important to note because we are underwriting rents as going down right now and all the investment and underwriting that we’re currently doing and then we are showing that rents do come out and again moving out in the 11, 12, 13 timeframe and values follow. Since we’re using a 10-year holding period, the fact that rents do go down in the short term really doesn’t bother us that much because we don’t plan on selling during a one-to-two year period. And so we will enjoy some good rent growth for the years following the recovery from the recession and that’s the value creation period that we have been talking a lot about in the last couple of conference calls.

Mitch Germain – JMP Securities

And how much near term rents roll would you accept in an acquisition?

Steve Rogers

Well we’re trying not to accept any in 2010, 11 because we do have some lease rollover in 2011 that Will spoke too earlier that we not like any in 2010 and 11, but except some in 12 and quite frankly we might even welcome some 13, 14 and 15, I mean we will welcome, there is going to be in a rent increasing market then and that’s place to make money.

Mitch Germain – JMP Securities

Great, and last question for Will, the Nabors space, 205,000 square feet. How much competitive space is available in Houston that can accommodate that big of a lease?

Will Flatt

Large blocks on the top of my head, I don’t have in front of me, I would say that in that particular sub market, they are very few. Now there are some potential pressures on that sub market and certainly there are enough blocks of this – couple of buildings on the energy corridor that have been built that could accommodate that space and then there is a always a sublease out there that, I may not have on top of my head. I would say that the rate that the big blocks of new space we charge compared to the rate that we are, we have a very favorable competitive advantage as we sit today.

Mitch Germain – JMP Securities

Great. Thanks guys.

Operator

We’ll go next to Dan Donlan with Janney Montgomery Scott.

Dan Donlan – Janney Montgomery Scott

Thank you, just one question Steve. Could you talk about the Houston sale and why that was deemed non-core and how that cap rate I believe it was around 10% compares to the rest of your assets in Houston?

Steve Rogers

The building is one of the first buildings we purchased in Houston and in fact I think in our modern year that was May 1, it was purchased in April of 1996, I think from 6 or $7 million. It’s a 1982 building, it’s a good building but if we went out today to acquire a building in Houston, it would look a lot different than One Park Ten. It would be a entire quality building, it would be a larger building, more economy scale at the building and probably be in a location that we would find to be more attractive from a rent point of view than the building. The 10 cap settled was at a time when the NOI in November of 2009 was a little bit lower and since November 2009, we’ve had some pretty good expense control of the building and have indeed increased the NOI of the building.

So it moved up in cap break, now had it moved the other way, we would have given you a lower cap break, but it didn’t, it moved positively and since we’re still the managing agent of the building, one of our PRS initiatives and we damn sure want to make sure we’re removing the NOI in the correct direction. So there will probably a little cap rate compression during at six month period, but I think mainly just we increased the NOI.

Dan Donlan – Janney Montgomery Scott

Okay, and then typically on your property management contracts, are those five years, 10 years or is it one year renewals, or how does that work?

Steve Rogers

The contracts that we have on our fund buildings run the life of the fund, those are what we deem to be recurring that would be Ohio PERS and then we introduced our hitting things on the Texas Teachers that will run the life of the building. So those are good long term contracts, I spoke to earlier that I think we should give a regular real estate cap break too. Everything else tends to be short term in nature, meanings really one month, three month, six months in nature.

Now what you sometimes get as if you do a good job, you earn your business every day, we had one building here in Jackson that we got the management contract down in 1990 and it was month-to-month and 20 years later we’re 240 months in those month-to-month contract. So those things happen, it’s basically just you do a great job for them every day, they’ll keep you own and if you do a funny job you get a pink slip or if they sell the building sometimes, to get you pink slip and that’s – we don’t give those in very high multiples at all. We give those low multiples.

Dan Donlan – Janney Montgomery Scott

Okay thank you.

Operator

We will take our next question from Rich Anderson with BMO Capital Markets.

Rich Anderson – BMO Capital Markets

Thanks a couple of questions here. At what point did this sort of cultural difference start to fester, I know the termination was February this year, but when did it kind of start to realize it?

Steve Rogers

Earlier than February Rich and we can’t really give you a lot of color on this matter today. I think I’ve said that and I think it will all come out in our remodel that will be part of the Freedom of Information Act, and I’ll welcome you to read it.

Rich Anderson – BMO Capital Markets

Okay, I mean I have a specific kind of personal reason, but I will talk to you that offline.

Steve Rogers

I sort of welcome that.

Rich Anderson – BMO Capital Markets

And the second is off of that sensitive topic as I understand, on the Fund II what happens if you don’t get the things fully funded by 2012?

Steve Rogers

Well there is no specific agreement on this subject, our only experience on the matter is in dialogue with other fund providers such as Ohio and others that have routinely told us, we like the discipline, don’t get in a hurry, if you need more time, let us know. I think commit that to you today but it’s kind of a commonsense thing and good partners tend to work with one another if that point comes. I don’t really anticipate that but we’re ready to get there, I think that would be the legitimate response we would expect.

Rich Anderson – BMO Capital Markets

How would you characterize Texas Teachers sort of financial status right now, interest in commercial real estate how has it changed, has it improved, have they pulled back a little bit, what is your thought there?

Steve Rogers

They are very, very fortunate to have not made significant speculative real estate investments at the wrong time in the cycle and unlike a lot of West Coast funds that did so, Texas is in extremely in good shape on the real estate portfolio and encouraged us to think outside the box and do some great things there for them and are highly supportive of the things that we are bringing in the door and talking about with them that. They are great shape.

Rich Anderson – BMO Capital Markets

So when you look at your FOCUS strategy, does that presume the entire Fund II is funded, I assume it does, but just –

Steve Rogers

It does.

Rich Anderson – BMO Capital Markets

Okay, thank you.

Steve Rogers

Yes sir.

Operator

Thank you. We’ll take our next question from John Guinee with Stifel Nicolaus.

John Guinee – Stifel Nicolaus

Okay, thank you.

Steve Rogers

Hi, John.

John Guinee – Stifel Nicolaus

Hey, I am looking at our fourth quarter report, and we look at CBRE does pretty good numbers. Got Phoenix at 24.5% vacancy, Atlanta 22%, Chicago suburbs 22.8%, Richmond was you’re exiting, 19.3%, Houston 15.9%, Chicago CBD 16.1%. The other major markets where you do business are Memphis and Jackson. Do you by any chance have the vacancy numbers for those?

Steve Rogers

We do, let’s see Jackson of course if I could see right there.

Will Flatt

And this is cross this is where we are.

Steve Rogers

We’re probably about 15% vacant in Jackson.

John Guinee – Stifel Nicolaus

Okay, second question. If you look at your gross rent roll downs which you were nice enough to provide which are, I think 8 to 10% a year, at a 50% gross margin is that translate straight to a 16 to 20% decrease on a net basis or not?

Steve Rogers

It does.

John Guinee – Stifel Nicolaus

Okay, third is, you’re running a $30 million TI lease and commission based building CapEx deduct from FFO to FAD which is about $1.40 a square – $40 a share using a $22 million share count. Do you get those same numbers?

Steve Rogers

We do.

John Guinee – Stifel Nicolaus

So at the end of the day if I am looking out two or three years, can we even get to a FAD above $1 a share?

Steve Rogers

Not projecting that out at this stage but I think it’s reasonable to assume, if you sort of look at the midpoint of the FFO run rate now has no acquisitions in it. So if you’re going to do the roll downs that you’ve appropriately done. We take that into account, that would be a subtraction to FFO and then you take the roll ups that come from other accretive activities then I think it at least possible that you would be in that range.

John Guinee – Stifel Nicolaus

Great, thank you.

Steve Rogers

Thank you and one other question, I think when you are outlining the various vacancy rates of the Parkway markets, I mean I think it’s probably fair to say it’s on our website that the national vacancy rate is approximately 20% today, following with that same CBRE report and our markets are slightly in excess of the CBRE national vacancy rate today and Parkway’s vacancy is about 400 and some basis points really below our market in national vacancy rate today.

So no one here is more aware of what is the national vacancy rate is and people who practice office building rules stay for living and we understand where we are in the cycle and are respectable of where we are in the cycle.

John Guinee – Stifel Nicolaus

Got you. Thank you.

Steve Rogers

Okay, the operator, we appreciate everyone’s questions today and was there a one last question John, I’m sorry. Not appeared to be. Operator if there are no further questions, we appreciate everybody’s interest today and I think in kind of closing if you just sort of if you’ll cut through some of the noise that you’re hearing out there, the real important things that we need to be doing are leasing space, buying buildings, running the business which was exactly what we’re doing. So thank you very much for your time today.

Operator

That does conclude today’s call. Thank you for your participation.

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Source: Parkway Properties, Inc. Q1 2010 Earnings Call Transcript
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