REIT Focus: Parkway Properties, Inc.

Jul.17.14 | About: Parkway Properties (PKY)

Summary

Parkway Properties is a REIT that acquires, owns, develops and manages quality office properties located in eight Sunbelt states. The portfolio contains 51 properties and 18.1 million sq. ft. of space.

Parkway has a market capitalization of $2.18 billion, a 3.5% dividend yield and debt-to-enterprise value of 40%.

We are not recommending the purchase of the stock, due to the elevated stock price, low dividend yield of 3.5% and premium to our NAV of 24%.

This REIT Focus is on Parkway Properties, Inc. ("PKY"), a publicly traded REIT specializing in the acquisition, ownership, development and management of quality office properties in high-growth Sunbelt markets. PKY owns 51 office properties containing 18.3 million sq. ft. located in TX, AZ, FL, GA, NC, PA, TN and SC. PKY also manages/leases an additional 11.3 million sq. ft. for third-party owners.

Tenant Information

PKY has 1,232 tenants, including BMC Software, Inc. (553,000 sq. ft. and 3.9% of annualized rent), Halliburton Energy Services, Inc. (443,000 sq. ft. and 3.2% of annualized rent), Bank of America (552,000 sq. ft. and 3.1% of annualized rent) and Connecticut General Life Insurance (453,000 sq. ft. and 3% of annualized rent). The average occupancy, rental rate as of Q1-2014 and average rental rate increase as of Q1-2014, were 88.5%, $30.13 per sq. ft. and 2.2%, respectively.

Major Events

In January 2014, PKY completed a secondary offering of 11,825,000 shares of common stock at a price of $18.15 per share, for total net proceeds of approximately $205 million. On April 1, 2014, PKY increased the amount of its revolving credit facility to $250 million, its unsecured term loan to $250 million and decreased its seven-year term loan to $100 million.

PKY was incorporated in Maryland in 1996, is traded on the NYSE and is located in Orlando, FL. PKY's debt is not rated by the rating agencies. PKY has 103 million common shares outstanding and a market capitalization of approximately $2.18 billion. PKY owns a 100% limited/general partner interest in its UpReit general partnership, Parkway Properties, LP.

Management

James R. Heistand, 62, is president and CEO. Mr. Heistand was appointed as president and CEO of PKY in December 2011, and served as executive chairman of the company just prior to his current role. Mr. Heistand joined PKY through a combination with Eola Capital, and founded Eola Capital in 2000 and served as chairman since its inception. Prior to PKY, Mr. Heistand served as chairman of the executive committee of DASCO, an owner and operator of medical office buildings throughout the United States.

David R. O'Reilly, 39, is EVP, CFO and chief investment officer, and joined PKY in 2011. Mr. O'Reilly's primary responsibilities consist of identifying new investment opportunities for PKY and managing the investment strategies for the current portfolio. Prior to joining PKY, Mr. O'Reilly was a partner and executive vice president of Banyan Street Capital, where he led the firm's investment activities. Prior to joining Banyan Street Capital, David served as the chief financial officer and director of Capital Markets for Eola Capital starting in August 2009.

Mr. Jayson Lipsey, 35, is EVP and chief operating officer. In his current role as COO, Mr. Lipsey is responsible for asset management, leasing and property management for PKY's owned assets, partnerships and third-party relationships. Mr. Lipsey joined PKY in 2001 as an acquisition analyst, where he assisted in the analysis of prospective acquisitions.

Financial Analysis and Valuation

Select financial data for PKY as of the Q1 2014 10Q, 2013 10K and supplemental information (in millions, where applicable):

Financial Data
Real Estate Assets, Gross $2,741
Total Assets $3,003
Property Debt $1,338
Common Stockholders' Equity $1,206
Revenue $104
Net Income $11
Net Income Per Share $.11
Cash Flow from Operations $9
Unsecured Revolving Credit Facility ($225 with $0 used) $225
Market Capitalization $2,180
Property Debt-to-:
Gross Real Estate Assets 49%
Market Capitalization 61%
Enterprise Value 40%
Dividend and Yield ($.75/sh.) 3.5%
Valuation Methodology:
Q1-2014 Revenue Per Above Annualized $416
Less: Q1-2014 Operating Expenses Annualized (excluding depreciation, amortization & interest expense, plus G&A expenses adjusted to $6.4M in Q1) 202
Annualized Net Operating Income 2014 $214
Projected Inflation Rate at 3.5% x103.5%
Projected Forward NOI for Next Year $221
Projected Cap Rate 7.5%
Projected Asset Value of Company $2,947
Add: Net Operating Working Capital 346
Land and Mortgage Loan (at book value) 3
Investment in Unconsolidated Joint Ventures (at book value) 136
Total Projected Asset Value of Company $3,432
Less: Noncontrolling Interests (289)
Total Debt Per Above (1,338)
Projected Net Asset Value of the Company $1,805
Common Shares Outstanding 105.9M (103.5M common stock shares and 2.4M in incentive stock awards)
Projected NAV Per Share $17.04
Market Price Per Share on 7/15/14 $21.12
Premium (Discount) to NAV 24%
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Financial Metrics

The gross real estate assets, property debt, revenues, net income (loss), funds from operations, return on invested capital and dividends per share for the years 2009 through Q1-2014 are shown in the table below:

(millions, except per-share amounts) 2009 2010 2011 2012 2013 Q1-2014
Gross Real Estate Assets $1,750 $1,770 $1,086 $1,763 $2,723 $2,741
Property Debt $953 $883 $916 $868 $1,400 $1,338
Revenues $265 $256 $164 $226 $292 $144
Net Income (Loss) ($16) ($9) ($137) ($51) ($30) $11
Funds From Operations $56 $57 $47 ($.045) $60 $35
Return on Invested Capital (1) 5% 5% 2.9% 4.1% 2.7% NA
Dividends Per Share $1.30 $.30 $.30 $.375 $.6375 $.1875
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(1) This is the ratio of cash provided by operations divided by stockholders equity plus property debt, less cash, and measures the return the REIT is earning on its invested capital.

As shown above, our net asset value per share for PKY is $17.04/share, versus a market price of $21.12/share. Current average cap rates for office properties, per our industry experience and CBRE's Cap Rate Survey, are in the 6% to 9% range, depending on the location and quality of the property, credit of the tenant and lease terms. We have used an average cap rate of 7.5%, due to PKY's portfolio being primarily well located Class A office properties.

Valuation Analysis

PKY's strengths, concerns and recommendations are as follows.

Strengths:

  • Ample liquidity, with $152 million in cash/equivalents and $225 million in unused credit facilities to take advantage of acquisition opportunities.
  • Diversified portfolio of 51 office assets in eight states.
  • Only $429 million in mortgage debt coming due through 2017.
  • 2.2% Q1 2014 average rental rate increase over Q1 2013.

Concerns:

  • Low dividend yield of 3.5%.
  • Elevated stock price at $21.12/share.
  • Low occupancy of 88.5%.
  • Experience level of some of the senior management team is light.

Recommendations:

PKY has a solid and well-located portfolio of office assets; however, we believe that the stock price is too elevated and trading at a cap rate of approximately 6.6%. We are not recommending purchase of the stock at this price. However, we would be buyers of the stock if the share price declines to $18 per share or less. PKY should also consider increasing its dividend, as the Q1-2014 AFFO of approximately $24 million easily covers the common stock and partnership units' dividend of 19.6 million.

A five-year price chart of PKY is shown below:

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.