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Parkway Properties, Inc. (NYSE:PKY)

Q2 2014 Earnings Conference Call

August 8, 2014 09:00 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

Craig Mailman - KeyBanc Capital Markets

Jamie Feldman - Bank of America/Merrill Lynch

Alexander Goldfarb - Sandler O'Neill

David Rogers - Robert W. Baird

Brendan Maiorana - Wells Fargo Securities

Rich Anderson - Mizuho Securities

John Guinee - Stifel

Bill Crow - Raymond James & Associates

Michael Salinsky - RBC Capital Markets

Emmanuel Korchman - Citigroup

Operator

Good morning and welcome to the Parkway Properties Incorporated Second Quarter 2014 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. 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. Thank you, Mr. Dorsett. You may begin.

Jeremy Dorsett - Executive Vice President and General Counsel

Good morning, and welcome to Parkway’s second quarter 2014 earnings call. With me today are Jim Heistand, Parkway’s President and Chief Executive Officer; David O’Reilly, Parkway’s Chief Financial Officer and Chief Investment Officer; and Jayson Lipsey, Parkway’s Chief Operating Officer.

Before we begin, I would like to direct you to our website at pky.com, where you can download our second 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 their 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 the expectations reflected in these 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 on Parkway’s second quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

With that, I will now turn the call over to Jim.

Jim Heistand - President and Chief Executive Officer

Good morning and thank you for joining today. We are very pleased with our second quarter and year-to-date performance. Since 2012, we have acquired a collection of best-in-class assets located in CBD and urban infill locations that offer a dynamic amenity base to our tenants. We have been very prudent in the timing of our investment decision and believe it has allowed us to build a strong portfolio at a favorable cost basis. We have reached a point in this cycle, where both economic and office fundamentals across all of our core Sunbelt markets have fully recovered and are beginning to show signs of strength, highlighted by above average job growth, positive net absorption and consistent rental rate appreciation.

Improved fundamentals coupled with increased investor demand for Class A office exposure within our core submarkets have led to increase – an increase in asset valuations across our core markets. As a result, we feel validated in the investment decisions we have made over the past 2.5 years and believe we have created considerable value for our shareholders in the process.

While these improved fundamentals have had a positive impact on asset value, it is also important to highlight that we are not seeing any meaningful office development throughout most of our markets. Lastly, we have stressed on a number of occasions the importance of creating strong regional platforms that enable us to leverage local market expertise. We have assembled an industry leading group of regional operators that have been critical in driving operational excellence at the property level as well as assisting in our underwriting of investment opportunities. In short, when you provide a talented operating team, a portfolio of best-in-class assets that are located in outperforming submarkets, you put yourself in a favorable position to be successful as demonstrated by our second quarter and year-to-date results.

Operating highlights in the period include 1.3 million square feet of leasing year-to-date, which is the most leasing we witnessed during the first half of any year on record in Parkway’s history. In the second quarter alone, we executed 811,000 square feet of leasing at a rate of $30.08 per square foot, with 336,000 square feet of new leasing at a rate of $31.57 per square foot. These rental rates have never been achieved before in the company’s history.

Same-store recurring cash NOI increased 3.5% and 4.2% for the second quarter and year-to-date respectively. Portfolio occupancy increased 70 basis points during the second quarter despite the addition of One Orlando and Courvoisier Centre, which have a combined occupancy of approximately 82.5% as of July 1 and reduced overall occupancies by approximately 25 basis points. Lastly, we are now over 91% leased. As previously mentioned, an increase of capital rotating into our markets has made it a bit more challenging to acquire high-quality assets at pricing that we feel comfortable with.

With that said we do believe that opportunities still exist to leverage relationships and creatively execute transactions to strengthen our portfolio. Our recent purchase of the mortgage note secured by The Forum at West Paces located in the Buckhead submarket of Atlanta is an example of our ability to secure a Class A value-add asset well below replacement cost of just over $200 per square foot. We will continue to closely monitor the investment landscape and identify value add and core plus assets that we believe can be acquired at favorable pricing that enable us to unlock value to the implementation of our leasing strategy.

Further we will look to capitalize on increasing demand for quality office assets through our markets and identify opportunities to the monetize investments and delever our balance sheet. Our potential disposition opportunities would be a mix of both legacy properties as well as recently acquired assets, which we have maximized value equation or cannot continue the gain scale in a certain submarkets. We believe our year-to-date performance has put us in a great position to continue to drive robust operational performance for the remainder of the year. While the leasing velocity across our portfolio has exceeded our expectations there is still room to run. And with the current mark to market on the portfolio of a positive 8.8%, we believe we can create considerable value a long the way.

With that, I will now turn the call over to David for an update on our recent investment activities.

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

Thank you, Jim. We have already covered the majority of the details related to our second quarter investment activities during past presentations and conference calls. So I will just provide a very brief summary for you this morning. On April 10, we completed the acquisition of the Courvoisier Center, a two building Class A office complex located in the Brickell submarket of Miami. Courvoisier is 343,000 square feet and has structured parking at 2.7 spaces per thousand square feet which is one of the highest parking ratios in the Brickell submarket and nearly double the rate of many Miami CBD office buildings. We acquired the asset for a gross purchase price of $145.8 million, which represents an implied cash cap rate of approximately 4.5%. The asset is 83.7% occupied as of July 1.

On April 14, we completed the acquisition of One Orlando Center and simultaneously restructured the existing mortgage on the assets. The 356,000 square foot Class A building is located in the Orlando CBD. The asset is 81.3% occupied as of July 1 and is expected to generate an initial full year cash net operating income yield of approximately 7%. We also recently announced the commencement of construction of Hayden Ferry III with 264,000 square foot Class A development in the Tempe submarket of Phoenix, Arizona. The Hayden Ferry development is expected to generate a stabilized cash NOI yield of approximately 9.6%. We anticipate total cost of the development to be approximately $68.8 million.

On July 2, we closed on a construction loan secured by the development for $43 million or approximately 60% of the anticipated total cost. The pricing for the loan was set at one month LIBOR plus a spread of 180 basis points, which will decrease to a spread of 160 basis points at stabilization. During the second quarter we incurred $4.7 million in construction costs which brings our total investment in Hayden Ferry III to $9.6 million. We remain confident about lease up prospects of the asset as office fundamentals continue to strengthen in the Tempe submarket. Our Tempe portfolio is over 96% leased as of July 1 and we have a number of LOIs out to perspective tenants. We have added a new schedule on Page 25 of our supplemental that provides details of the Hayden Ferry III development which we plan to update each quarter.

Subsequent to the end of the second quarter we acquired Millenia Park One, 157,000 square foot Class A office building located in Millenia submarket of Orlando. We acquired the property for gross purchase price of $25.6 million which represents an implied cash cap rate of approximately 6.5%. This former EO asset was 81% occupied at acquisition. With an acquisition price of $163 per square foot Millenia Park One is the high quality value add asset that we were able to acquire well below replacement cost.

The Millenia submarket is located south of the Orlando CBD an office tenants of premier urban infill location with its rich amenity base as well as easy access to desirable executive housing and the Orlando international airport. The Millenia market consists of 2.3 million square feet of office space with Class A assets totaling approximately 572,000 square feet. With Millenia Park’s current in-place rents approximately 5% below reported market rates, we believe we have an opportunity to unlock additional value as we lease up the asset.

On July 29, we acquired $50 million first mortgage note secured by The Forum at West Paces, a 222,000 square foot Class A office building located in the Buckhead submarket of Atlanta. The asset was constructed in 2001 as part of a 17-acre European inspired luxury mix use development in Northwest Buckhead. This transaction was structured as a note purchase with an eventual intent to foreclose and own the asset on a fee simple basis.

We have purchased the $50 million note, which was previously under special servicer oversight for a gross purchase price of $47 million. We expect to foreclose on the property later this quarter. This boutique office asset will increase our total exposure in the Buckhead submarket to approximately 1.4 million square feet and enhance our opportunity to create value through leasing. Buckhead continues to be one of the strongest performing office submarkets within Atlanta highlighted by the highest rental rates in the market and approximately 600,000 square feet of net absorption over the past 12 months according to CBRE.

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

Jayson Lipsey - Chief Operating Officer

Thanks, David. We are extremely pleased with our second quarter operational results and believe they reflect all the hard work our regional teams have put into integrating recent acquisitions, leveraging favorable market conditions and focusing on creating value at each of our assets. In particular, our second quarter leasing activity was excellent.

Let me share with you a few highlights from the quarter. We executed 811,000 square feet of leasing during the second quarter at an average rate of $30.08 per square foot, an increase of 9.7% from the previous quarter. Of the total leasing activity, approximately 36% was completed at assets acquired during the last 12 months. The average rental rate for leasing completed at these assets was $40.04 per square foot. New leasing activity totaled 336,000 square feet, which was an increase of 146% from the trailing four-quarter average.

New leasing was executed at an average rate of $31.57 per square foot, which is an increase of 9% from the first quarter. We executed 413,000 square feet of renewal leasing during the period at an average rate of $28.10 per square foot, which represents a positive cash renewal spread of 5.1% from the expiring rental rate. I would also like to highlight second quarter leasing activity at four assets, which is indicative of the velocity we are effectuating across the portfolio.

The first building I would like to highlight is One American Center in Austin. During the second quarter, we completed 53,000 square feet of new leasing at the building. As a result, we have increased the overall lease percentage of the asset to 86.1% compared to 77.4% occupied when it was acquired this past December. These numbers do not include the recent execution of a 32,000 square foot new lease with We Work, which we executed subsequent to quarter end and increases our lease percentage an additional 6% bringing the building to over 90% leased.

Recent activity of One American serves as a proxy for the success we have effectuated throughout the Austin portfolio. During the first two quarters of the year, we have leased a total of 231,000 square feet of space, which has resulted in 185,000 square feet of net absorption. At the end of the second quarter, the Austin portfolio was 87.7% leased, which is an approximate 215 basis point increase from overall occupancy at acquisition. Leasing performance of the Austin portfolio has exceeded our expectations as leasing velocity has offset the approximately 145,000 square feet of no move-outs during the first six months of 2014. Then lastly with the current mark-to-market on the Austin portfolio at positive 9.1% continue lease up activity is expected to drive NOI growth moving forward.

The second building I would like to highlight is San Felipe Plaza located in the Galleria submarket of Houston. We completed a total of 110,000 square feet of leasing at this building during the second quarter. Of the total leasing at the asset, 68,000 square feet were renewables that were executed at a positive renewal cash spread of approximately 6.6%. As a result, we experienced 84% retention at San Felipe during the second quarter. The building is now 90.4% leased, which is an increase of approximately 400 basis points compared to its occupancy at acquisition last December.

The third building I would like to highlight is NASCAR Plaza located in the CBD submarket of Charlotte. We executed 29,000 square feet of new leasing at this building during the second quarter. The asset is currently 97.2% leased compared to 88.1% occupied when it was acquired in December 2012. After lagging some of our other markets and leasing activity, the Charlotte CBD has begun to stabilize and demand for space has picked up with Class A direct vacancies currently below 7% according to JLL Research.

Lastly, I would like to comment on the Raymond James Tower in downtown Memphis, a legacy Parkway asset. We completed 186,000 square foot renewal lease with Raymond James during the quarter. The lease is crucial as it locks in an anchored tenant and provides stability to the asset for a 10-year lease term. Given the market conditions in downtown Memphis, the lease economics on the Raymond James lease are an outlier when compared to the rest of our leasing activity. If you exclude the Raymond James lease from our reported leasing activity, the rental rate on the second quarter renewal leasing across the portfolio would have increased $7.92 to $34.19 per square foot and the rental rate on total leasing for the quarter would have increased $5.77 to $33.18 per square foot.

As a result of second quarter leasing activity, the portfolio is now 91.3% leased an increase of 110 basis points from the previous quarter. At the end of the second quarter, we had 380,000 square feet of signed leases that are expected to commence in the next three years, of which approximately 50% is at recently acquired assets, including 95,000 square feet at San Felipe Plaza in Houston, 38,000 square feet at 7,000 Central Park in Atlanta and 34,000 square feet at 300 West 6th Street in Austin.

While we have been pleased with the leasing performance of our recently acquired assets and believe they will continue to make a meaningful contribution to NOI growth, our legacy portfolio continues to post strong results. During the second quarter, our share of same-store recurring NOI increased 2.4% on a GAAP basis and 3.5% on a cash basis compared to the same quarter of the prior year. Leasing activity during the second quarter was done at an average cost per square foot of $4.35, which is a 1.1% decline from the previous quarter. Additionally, our concession ratio in second quarter leasing activity was 14.5%, a decline of 160 basis points from the first quarter and a 250 basis point drop year-over-year. Additionally, I want to confirm that we are still actively engaged in negotiations with neighbors regarding their 225,000 square foot renewal of One Commerce Green in Houston and I am looking forward to providing you an update once there is a resolution.

Lastly, given our year-to-date leasing performance and considering leasing prospects for the remainder of the year, we are reiterating year end occupancy guidance of 89.5% to 90.5%. This range includes second and third quarter acquisitions of approximately 1 million square feet of value-add assets, which have a combined occupancy of approximately 75.2% and will reduce overall portfolio occupancy by approximately 80 basis points.

I will now turn the call back over to David to discuss our financial results.

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

Thanks, Jayson. We completed the second quarter with FFO of $0.33 per share. Our second quarter results include the negative impact of one-time charges totaling $2.6 million primarily related to the fourth quarter 2014 merger with Thomas Properties. Excluding these non-recurring items, our second quarter recurring FFO was $0.35 per share. Our FAD during the second quarter was $0.23 per share. We have provided a reconciliation of FFO, recurring FFO and FAD to net income on Page 9 of the supplemental report.

On April 1, we amended our existing unsecured credit facilities. The amendment increased the size of our revolving credit facility to $250 million and consolidated our two existing unsecured term loans into a 5-year tranche totaling $250 million and a 7-year tranche totaling $100 million. The amended facility agreement provided for lower pricing, greater flexibility and increased borrowing capacity both as a result of an improved lending environment and our substantially upgraded portfolio.

While our 7-year term loan tranche had a delayed draw feature, we ended up borrowing the entire $100 million on April 8, 2014 to fund our purchase of Courvoisier Centre. We also used a portion of these proceeds to repay the first mortgage debt secured by the Bank of America Center in Orlando, which had an outstanding balance of $34.2 million, including breakage cost. During the second quarter, we recognized a loss on extinguishment of debt of 339,000 on the repayment of this mortgage. As a result of the amended facility we also had several changes to our outstanding derivative transactions during the quarter.

To hedge against the LIBOR borrowings on the $250 million five year term loan, we de-designated two of our swaps totaling $125 million that were previously associated with $125 million five year term loan and re-designated the swaps to unspecified one month LIBOR borrowings. The two swaps had an asset value of approximately $1.7 million held and accumulated to other comprehensive income which was reclassified into interest expense during the quarter as a result of the re-designation. Additionally, we entered into a new $100 million floating to fixed interest rate swap in conjunction with our seven year term loan which has a fixed rate of 2.6% and matures in March of 2021. And we terminated the $33.9 million swap associated with the Bank of America Center first mortgage.

The Bank of America Center swap had a liability value held and accumulated to other comprehensive income which was also reclassified into interest expense during the quarter as a result of the termination. The net impact of these three swaps that were reclassified into interest expense was a one-time increase in interest expense of approximately $121,000. Giving current market expectations for the long-term trajectory of interest rates, we believe entering into these swaps was a prudent decision to mitigate future risk. Lastly on May 28, we implemented an ATM program allowing us to sell from time to time up to $150 million of Parkway common stock. Through June 30, 2014, we have sold 171,800 shares through the ATM generating net proceeds of approximately $3.5 million which have been primarily used to help fund development costs of Hayden Ferry III in Tempe, Arizona.

Our net debt to EBITDA at the end of the quarter was 6.6 times. Excluding the impact of $1.9 million non-recurring realignment charge related to the Thomas Properties merger, our net debt to EBITDA multiple closed the quarter at 6.4 times. This is obviously at the high end of our targeted leverage range and the addition of both The Forum and Millenia Park One subsequent to the end of the quarter will further increase our leverage albeit modestly. While we are comfortable operating at the higher end of our targeted leverage range, we do see a clear roadmap to deleveraging over the second half of 2014.

First as Jayson mentioned we have approximately 380,000 square feet of leases that are set to commence in the next three quarters, so we will have a positive contribution to EBITDA. The second path to deleveraging is through asset sales. Consistent with Jim’s earlier remarks regarding current asset pricing in our markets we are constantly evaluating the potential sale of some of our assets including those assets which have been acquired by this management team over the past two and a half years. In certain situations where we believe that have maximized value, creating significant gains or can no longer execute on our stated strategy of aggregating scale on certain submarkets, we evaluate the potential sale of those assets .To that end, we believe that we will execute between $200 million and $215 million in assets sales that we expect to be closed in either the fourth quarter of 2014 or the first quarter of 2015.

As discussed earlier we incurred approximately $460,000 in incremental interest expense this quarter for the early extinguishment of debt on Bank of America and the re-designation of our term loan swaps. Additionally as a result of higher than expected consulting, severance and litigation costs, our TPGI merger related expensed exceeded our previous expectations by approximately $500,000. These one-time expenses had a negative impact on our reported FFO in the second quarter by $960,000. This was entirely offset by an increase in property net operating income resulting from the recent success Jayson detailed earlier on the call.

Now, onto guidance, based on our results during the first half of the year and our revised projections for the remainder of the year, we are increasing our reported FFO outlook to a range of $1.34 to $1.41 per share for calendar year 2014. Excluding one-time expenses and other non-recurring items all of which are expected to total approximately $5.5 million to $5.6 million, our recurring FFO outlook range is $1.39 to $1.46 per share. We have provided updated guidance ranges for the underlying assumptions related to our FFO outlook in our second quarter earnings release, but there are few changes in line items worth noting.

First, we have now included a separate line item for net profit from our condominium sales of $1.3 million, which was previously included in our cash NOI guidance. We are also increasing our cash NOI guidance by $4 million at both the low and high end of our guidance ranges. Including the removal of the condominium sales from our previous guidance, the true increase to our cash NOI guidance is $5.3 million. Also of note, we are reducing our guidance for the management company after-tax net income to a range of $3 million to $5 million.

This decrease is driven by two main factors. First, we recently lost some third-party management contracts, including both One Orlando Center and Millenia Park One, which we have acquired, but were former third-party managed assets. Second, we have made a structural change to the management of our Austin joint ventured assets. In Austin, we have moved our onsite engineering and property level employees from a third-party provider to Parkway employees. The result of this change creates a ripple effect throughout our at share income statement.

First, our management company expenses increased by hiring these new employees. This increase in management company expense is partially offset by revenue received from our Austin joint venture. Our share of that revenue, which is 40% consistent with our ownership, is eliminated in our financial statements as an intercompany transaction from management company revenue, which creates a loss at the management company. The revenue elimination in our management company has a corresponding elimination and property operating expense, which thereby increases our NOI from the Austin joint venture. The net result of these entries is that there is no impact to either our net income or FFO, but there are changes in the individual line items in our financial statements.

Finally, as a result of the leasing activity from the first half of the year, we are maintaining our occupancy guidance despite the acquisition of 1 million square feet in the second and third quarters, which has a negative impact on occupancy of 80 basis points. Also as a result of leasing activity, we are increasing our guidance for both straight line rent and capital expenditures. As is our practice, we have not assumed in our outlook any additional investments or dispositions other than those announced nor any potential capital markets activity. And we will provide updates to our outlook should a material event occur that would change our stated ranges.

That concludes our prepared remarks. And with, I will turn it over to the operator to open the line up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from Craig Mailman of KeyBanc Capital Markets. Please proceed with your questions.

Craig Mailman - KeyBanc Capital Markets

Good morning, guys. David, could we just hit on dispositions for a second? So, 4Q and 1Q ‘15 is anything under LOI at this point, are you guys just starting the marketing process?

David O’Reilly

Yes. Craig, I would tell you that they are in various stages along the way. As we have always done, we will announce these as they close and lesser of size that they become material, but we would announce them we have money at risk from the buyer, but I would tell you candidly, these are things that we will really feel much more comfortable talking about when we close rather than publicly discussing LOI is there anything else, because it does – it could have a negative impact on the process.

Craig Mailman - KeyBanc Capital Markets

Okay. And then maybe you will talk about this, maybe you won’t, but it sounds like a blend of legacy assets then more recently acquired, what’s the cap rate range that we should assume, blended?

Jim Heistand

Well, I think right, this is Jim. I think we have talked about on numerous occasions if we were to just look at some of the legacy Parkway assets that we have talked about, those might have aggregated maybe top $50 million. So, the predominance of that number would be on assets that we had purchased. So, we can’t say what cap rates are, but we anticipate the cap rates and those will be significantly lower than some of the legacy Parkway assets we sold in the past.

Craig Mailman - KeyBanc Capital Markets

Okay. That’s helpful. And then just the use of proceeds, you guys had mentioned it’s a little bit more difficult in this environment to source acquisitions, just if you guys look out to what you in the pipeline and timing of these dispositions. Is it likely that you’ll be able to shelter them in the 1031 or could there be upside pressure on dividends, just thinking on that?

Jim Heistand

I am glad you think so highly about that we’re going to generate huge gains, which is great. And listen we love to do something in a tax efficient way that would allow us to 1031 and retain that capital to reinvest into our business. We’re not going to be pressured into doing it at 1031 if it’s not a great opportunity and a good asset. I’d rather distribute in a special dividend than buy a bad building for the sake of maintaining a tax basis and not having to do that.

David O’Reilly

I think Craig, a 2 years ago for I mean let’s – there’s no doubt as I said in the remarks that the market has gotten tighter in terms of opportunity, so those are just not as many as there was obviously 2, 2.5 years ago. Having said that there’s still opportunities out there as we – if you look where we are just year-to-date, we are $330 million worth of acquisitions so far. So, we’re still optimistic that we’re still finding opportunities that create the kind of value and remember we’re looking at assets that we can – if we buy for a buck it’s going to be worth more over three to five years, that’s how we’re evaluating. So that we can take some of these gains and put them into assets that are going to create more value that’s what we’re – that will be our preference and that’s what we’re looking to do.

Craig Mailman - KeyBanc Capital Markets

Okay. And then just one last one on the Forum, just could you guys talk about how that came to you guys is that relationship with special servicer and kind of where you guys think that one stabilizes in a yield?

Jim Heistand

Look, that was a note purchase, it was marketed to a very small group, it was marketed directly by special servicer. I think that we have a little bit of experience in those type of situations and understand that certainty, speed and doing diligence upfront with a note purchase is absolutely paramount for the seller. So, I think that while it was a marketed process, we did have I think a distinct advantage from a yield perspective.

This is a – it’s up 50% occupied, if it’s to cap going in, but we do think that over the three to four year period that we can reach stabilization and we’re not really projecting any leasing in the first 12 months consistent with all of our past practices, that’s the building that can stabilize at nine or slightly above.

David O’Reilly

That was a perfect example of our local Intel and John Barton in Atlanta, I mean he has talked to us for some time in terms of, he knew there was opportunity to lease that property and given the process within they weren’t – they obviously they weren’t doing such a good job and they weren’t being aggressive about it. So, we had been watching that for some time and once we knew it we finally come to a point whether we’re going to trade the note, we had already done quite a work on it.

Craig Mailman - KeyBanc Capital Markets

Great. Thank you guys.

Jim Heistand

Thanks, Craig.

Operator

Thank you. Our next question is coming from Jamie Feldman of Bank of America/Merrill Lynch. Please proceed with your question.

Jamie Feldman - Bank of America/Merrill Lynch

Great. Thank you. Good morning. So, I guess as you guys were talking about acquisitions getting a little bit more challenging or at least more competitive. What end Hayden Ferry are getting started, what are your thoughts on potentially more developments and what are the opportunities in your portfolio and I guess you would need to buy land to do it kind of how we should be thinking about that part of your strategy at this point of the cycle?

Jim Heistand

Well I mean Jamie, we do have I mean we’ve always said we’re not necessarily developers, but we do have a number of few pads that are continued into the properties that we own, we have some in Tampa, we have some in Houston. And I think we said to the extent we can secure locations that are competitive or would be competitive when they are built to our existing properties, we would do that. But it’s not the focus of our business, but we do have a number of opportunities within the portfolio, but in a relative scale they are not that large.

But we still feel that in most cases the rents that would support the new development having got their yet. And so just like we do with Hayden Ferry with the opportunities present themselves to acquire some closely located land of the assets we own, we would do that, but it’s not going to be a large component of our business plan.

Jamie Feldman - Bank of America/Merrill Lynch

Okay. And then I guess thinking about supply, can you talk a little bit more about Houston and what you guys are seeing there and any concerns you may have on excess supply, I know you are in specific sub-markets. But how are you guys thinking about that market?

Jayson Lipsey

Jamie, this is Jayson. We’re keeping a very close eye on it. Houston today has about 16.3 million square feet under development. And I know that, that’s a big number. I think that as we have observed the market, there are a couple of things that give us some level of comfort. The first is that there is a significant number of own or occupied buildings that are in development included in that number. I think another thing that gives us some comfort is that entire development pipeline is already 65% pre-leased. And given that the deliveries on those are can be significantly far on the future in some of the development pipeline, I think that we have got confidence given Houston’s significant continued net absorption that, that development pipeline can be readily absorbed. I mean, if you look at the kind of the average net absorption of Houston, that’s basically 3.25 quarters of net absorption in the development pipeline right now.

Jim Heistand

Yes. Jamie, I think one of the things we look at that makes us – gives us a lot of comfort if you look at the basis of the assets that we own there and the rental rates that we need to really continue to grow rents and outperform, we are still at a level way below what replacement rents would be to support that new development. So, for an example in our City West project, we are getting rates in the high 20s net. To do the new developments, you have got to be in the low to mid 30s net. And as you know, the in place rents in those are substantially lower. So, we have got – we are not in a position where we have got to get competing rates to new development to make money for us.

Jayson Lipsey

Okay. And as I mentioned Jamie, I was just going to say as I mentioned in some of my prepared remarks, we continue to see fantastic velocity in Houston, both in terms of new leasing activity as well as continued rental rate growth. So, the development to-date has not had an impact on continued recovery upon the metals in Houston.

Jamie Feldman - Bank of America/Merrill Lynch

Okay. And then I guess just finally, so we have seen more investment in Charlotte this quarter, you guys and one of your peers buying more there. How should we think about this cycle and I guess not necessarily Charlotte per se, but maybe that region? How long is this kind of just monies finally flowing into these markets or is there something changing longer term in kind of that Southeast Sunbelt region that you think really has some legs there for a long time?

Jim Heistand

So, you talked about all of our markets broadly or just specifically the Charlotte?

Jamie Feldman - Bank of America/Merrill Lynch

Well, I just know you guys I mean Charlotte seems to have come to the forefront lately as a market for additional investment. So, I am just trying to think what’s the longer term story for Charlotte and even some of the markets around there maybe Raleigh or Nashville or just – did it feel different cycle or we just hit the part of the cycle where it’s time to put money to work in those markets?

Jim Heistand

Well, I think a couple of things. The Charlotte is specifically, because we are not in Raleigh and Nashville, but in Charlotte, you had a little bit different dynamic. You had the predominance of quality assets were owned by the banks. So, you have seen over the last two years, Fifth Third and Hearst is all the Bank of America assets. So, you are seeing more private ownership coming into Charlotte and as opposed to being dominated by the owners and banks that own the assets in that market. That’s number one. Secondly, the dynamics of that market have been strong. If you recall, these guys put almost almost 3 million square feet of new development during the worst time of the marketplace. And it’s already back down to single-digits. So, there is continued growth. The banks have stopped from a contraction standpoint are beginning to expand again, but there is other companies that are moving into Charlotte.

And I think that the Charlotte story is consistent with our overall strategy and that is a more urban amenity rich, lots of multi-family being developed, all the various venues are in the CBD. So that CBD we believe has a great future for it and that was happening in Charlotte is pretty consistent with what we are seeing in the Sunbelt. And so the cost to replace these assets continues to increase. So, we like the long-term viability of Charlotte. I mean, at the time, we bought Hearst we could have bought Fifth Third for $237 a foot. We didn’t have the capital. If you remember, we didn’t have the access to the capital markets and we had just gotten the investment from TPG. So, we would have liked to have owned both by that time. We think it’s a great opportunity in that building and so somebody else coming in and validated our belief in the long-term viability, Charlotte is good for us.

Jayson Lipsey

Jamie, I think one of the points you made in your question is it’s ongoing and over the past two quarters, we have really seen the reemergence of the institutional buyer into the Sunbelt markets. And I think as the cycle first started into recovery, those type of buyers were limited to more gateway type cities and more recently as the fundamentals has picked up, the competition with the institutional buyers has also picked up.

Jim Heistand

Yes. I think the fundamentals has been, I mean, the improvement in fundamentals now has been universally accepted, where I think we don’t go that long ago, there were still some setbacks as to whether or not those fundamentals are long-lasting and we see them as continuing absence of macroeconomic event that we can’t foresee.

Jamie Feldman - Bank of America/Merrill Lynch

Okay, that’s very helpful. Thank you.

Jim Heistand

Thank you, Jim.

Operator

Thank you. Our next question is coming from Alexander Goldfarb of Sandler O'Neill. Please proceed with your question.

Alexander Goldfarb - Sandler O'Neill

Yes, hi, good morning. David, hey how are you? First question is just going back to dispositions, one I think I heard correctly you said that the dispositions are not in this year’s guidance. And is that – that’s right, right?

David O’Reilly

That is correct. The timing of those sales would be late in fourth quarter or early in the first quarter. So, even if they were included the impact would be nominal.

Alexander Goldfarb - Sandler O'Neill

Okay. And you mentioned dispositions as the way to de-lever, but obviously when you are selling asset, you also lose the income. So, in a set, it’s some sort of a neutral event if you think about especially if it’s an encumbered asset. So, are the assets that you are thinking of, are they unencumbered? I just want to get a better sense for how to think about the real net impact when you strip away the income and the offsetting debt?

Jim Heistand

I think it is a mix of encumbered and unencumbered assets. The only difference between two of the proceeds we used to de-lever is the rate of the debt under which you are repaying, Alex and whether it’s line of credit or whether it’s the secured debt, even those rates aren’t that high relative to the line of credit. So, for us it’s more not as much as earnings impact in next year’s FFO, it’s about value creation. And if we have created value in an asset and we have got to a spot where we thought we would maximize and that asset is now a low IRR asset, it’s time to recycle it and find a very use of that capital and liquidity to another opportunity like The Forum, like in Millenia, where we think we can really drive shareholder returns.

Alexander Goldfarb - Sandler O'Neill

Okay. And then on the Eola asset, with the 6.5% on the current occupancy, the 81% or is that on the stabilized and then how many other Eola assets are you guys thinking that you would want to see in the Parkway’s portfolio?

David O’Reilly

The 6.5% is on current occupancy. We think that, that stabilizes north of any over the 3ish years to stabilize. And might there be an alignment in there maybe, yes, I mean there is really not much left in the legacy Eola portfolio.

Jim Heistand

That would fit our strategy.

David O’Reilly

This is really finishing up with One Orlando and now Millenia Park I think we have really done a great job of mining the best asset.

Jim Heistand

And I think two Alex, both of those we are in some form of debt restructure like the One Orlando downtown and so we were tracking that and once the letter was prepared to trade it, we obviously got to take care with that time. So, it was a function of being able to move on it. I don’t see much if any on a going forward basis. That will be part of the Eola legacy assets.

Alexander Goldfarb - Sandler O'Neill

Okay. And then just a final question and maybe this is maybe part of the Ray J leases it’s part of this. It looks like while your overall leasing costs were about the same a little bit lower than prior quarters, when you look at the breakdown, the renewal TIs were lower this quarter, while new and expansion TIs were higher. If you could just give us some color, this is just normal quarterly variation or if we should expect some of this going forward with what you are seeing in your next quarter to our leasing pipeline?

Jayson Lipsey

This is Jayson, Alex. I think a lot of what you are seeing is just normal quarterly variability. We are not seeing any trends and capital that suggest that they are trending upwards at all. I think if you breakdown our leasing activity specifically, you are correct, renewals were lower. That was driven largely by the Ray J renewal in Memphis and new deals were slightly higher. And that was really driven by just a couple leases in Austin specifically that just had specifically bad space. It required slightly higher TI allowances, again, with really fantastic rents. So on a concession ratio basis, it’s still great deals. So, I think what you are seeing this quarter is really just a function of normal variability.

Alexander Goldfarb - Sandler O'Neill

Okay, thanks a lot.

Jayson Lipsey

Sure.

Operator

Thank you. Our next question is coming from David Rogers of Robert W. Baird. Please proceed with your question.

David Rogers - Robert W. Baird

Yes, good morning guys. Maybe Jayson could you talk a little bit more about what you are seeing in terms of Orlando and Tampa, I think you identified maybe one of the assets in your comments that you were successful at, but a little more broad commentary on any market rent growths you are seeing and are we finally seeing some kind of resurgence of activity in those two markets which I think to this point have lagged to some degree?

Jayson Lipsey

Sure. I think that we are – Tampa has done well for us for several quarters now. In fact our portfolio in Tampa is at 96% leased. So I think that we continue to see really strong demand for our portfolio in Tampa and generally good market dynamics. This quarter was a little bit of an outlier because there was a large move out in Westshore that skewed the statistics a little bit, but in general our portfolio has performed very well in Tampa. To your comments Orlando I think up until recently has been a different story. And while we are not at a point of this cycle we are seeing big concessions on rental rate growth in Orlando, I am very encouraged for the first time in probably several quarters we are seeing a significant increase in activity. So I think that ultimately that will lead to improve leasing economics, rental rate growth, higher occupancies but really the occupancy needs to come first.

David Rogers - Robert W. Baird

Great. And then David maybe going back to one of the comments you had made and thanks for all the color on the third party management business and the changes with respect to the acquisition in Austin. I think year-to-date I think you are running at a loss maybe in the management company and you are still guiding to income, positive income for the remainder of the year, is there still some thing kind of one-time in nature that really hits you year-to-date, does it have something to do with the TPGI assets and how do we get to that positive net income for the second half of the year?

David O’Reilly

Well, I would say that the numbers to focus on and looking at the management company are the net share of income statement because that is where all the eliminations takes place and that’s where you are actually seeing the true after tax net income of the management company and based in that first half of the year we are running at positive $2.5 million – I am sorry $2 million which is consistent with our balance right now. And the change that we enacted this quarter did cause a little bit of lumpiness, it caused a meaningful drop in 2Q that was largely offset by some very good numbers in the first quarter. I would expect that the second half of the year more stabilized and working safer level that we will get us back towards that earnings range.

David Rogers - Robert W. Baird

That’s helpful. And to follow maybe on the guidance as well, I think your total G&A guidance for the year appear to stable but I think the components underlying some of that that you provided in the line items below that all seem to move higher, so is there something in core G&A that’s going down or any reallocations in there that we should think about or what’s driving maybe what would be the core number for you down at least appears that way in your guidance?

Jim Heistand

Yes. I think that is correct. Remember when you look at the overall G&A guidance and when you back out the stock comp, you back out the TPGI and the acquisition costs you get to a core guidance that from last quarter is actually down a little bit. There is a little bit of allocation between G&A and management company that is shifting around a little bit and that happens on a quarterly basis where we are evaluating all the time not only our accounting team and back office spend, but our field personnel spend between owned to managed assets. So there is some variability there, it’s not really the meaningful part of what’s driving the change in management company guidance.

David Rogers - Robert W. Baird

That’s helpful, last question on Page 28 of the supplement you gave a mark to market it looks like the expiration leases that you are quoting are probably on a cash basis, but I don’t know that to be sure and the comparable mark to market on that rent is that a cash or a GAAP number on that far right column?

Jim Heistand

So it is a cash number that’s expiring and the quoted market rate is a cash rate based on where we would think we would lease that space today.

David Rogers - Robert W. Baird

Great. Thanks guys.

Jim Heistand

Thank you.

Operator

Thank you. Our next question is coming from Brendan Maiorana of Wells Fargo Securities. Please proceed with your question.

Brendan Maiorana - Wells Fargo Securities

Thanks. Good morning. So David or maybe its Jayson just to follow-up on the mark to market the ’15 mark to market moved up significantly, I think you are plus 5% last quarter, you are plus 13% is that a pull forward of raging lease because I don’t recall whether or not those are ‘15 expirations and if so when does that lease commence at the new rate?

David O’Reilly

That’s exactly what’s happening Brendan and so basically what we did with that lease is we actually re-casted. And so it is functionally commenced. Now form a cash standpoint there what they owe us is not going to change until their natural expiration at which point the rate resets. But effectively that’s exactly what happens.

Brendan Maiorana - Wells Fargo Securities

And when is the – when was that expiration Jayson?

Jayson Lipsey

Thank you. I want to say it’s like mid-15.

Brendan Maiorana - Wells Fargo Securities

Okay, great. Okay. And the leasing plan for the remainder of the year, so it looks like if I am thinking about this correctly you need to pick up about 250,000 square feet of occupancy between now and year end when you take on those Q3 acquisitions that are low in terms of an occupancy rate, you got 300,000 square feet set to commence, that’s leased that hasn’t yet commenced throughout the remainder of the year, how should we think about the retention rate, that you expect on the 850,000 square feet of expirations and the outlook for new leasing for the remainder of the year?

Jayson Lipsey

Well, I think part of what’s happening in Brendan is that we are taking on newer lower occupy buildings. And so as we mentioned that as a pretty significant negative impact on our current invoice occupancy. And so I think that needs to be factored in. I think that we are appropriately viewing our expirations, at least once we know of, through the remainder of the year. And so I don’t think that there is anything throughout the remainder of the year that’s been consistent with our historical retention percentages.

Brendan Maiorana - Wells Fargo Securities

I am sorry go ahead.

Jim Heistand

I think Brendan I think for Jayson, he keeps getting the occupancy up to that 90% and we keep on assets that are lower occupied, so he keeps running in place in some regard.

Brendan Maiorana - Wells Fargo Securities

Yes. I understood. So but there is nothing from – I mean you guys have sort of run at longer term at around 70% to 75% retention is that a pretty fair outlook for the rest of the year for the expirations?

Jim Heistand

I think that’s a reasonable assumption Brendan I mean there is – the good news is they are just not much expiring throughout the balance of the year. And so I think that if we target anywhere between if we can do north of 70%, we feel like that’s been great quarter. My sense is that there is nothing out there that’s going to be a significant outlier.

Brendan Maiorana - Wells Fargo Securities

Sure, okay. And then just last on the two acquisitions. So I – they both look like you are getting nice values on a per pad basis and a nice opportunity to move occupancy, how should we think about kind of the submarket exposure of each I think about The Forum and it’s probably two miles away from kind of your core three assets and inside the Buckhead Loop, so it seems like even though Buckhead it’s a little bit of a different submarket specific. And then Millenia I always thought of it’s a little bit more of a suburban submarket in Orlando, but maybe my assumption on that is off?

Jayson Lipsey

Well I think first let me talk about Forum, the good news is it’s about two blocks from John Barton’s house. So we think that that’s always going to get extra special attention just as a result of its location. And I think that the good news of that building is while it’s off sort of the Loop, the Buckhead Loop it’s a great location. You have got lots of executive decision making housing it’s in close proximity of the building, it’s probably going to attract the slightly different user than we would attract at 3344 Peachtree or in Tower Place 200 or Cap City. But we still thing that the leasing prospects of the building are really outstanding. As it relates to Millenia, this building…

Jim Heistand

Just want to backup one minute on the Buckhead Brendan I mean you’re seeing the pricing on some of the assets that have come to sell. Our three assets are mid to high-90s total occupied. This asset’s what left for 50% at a pricing way below replacement cost. John Barton is aware but number of leases that could have gone into that building have they had an operator prepared to get it done. So we love to have it be next door to 3344 building. But in reality that opportunity didn’t exist. But this does give us an opportunity to create a lot of value. So I mean that’s what we are trying to do it’s in the right submarket, it has the right quality, it’s got structured parking, it’s a high quality asset. We had to move a little bit further to get it. But we think the pricing justified that decision going forward for it.

Brendan Maiorana - Wells Fargo Securities

And Jim just the basis going in obviously, it’s nice around $210 a foot, where do you think that ultimately gets to when you stabilize the asset I think about TI dollars and what not that needs to go in there?

Jim Heistand

If you are looking at rental rates on that building into the low-30s, so we think this has an opportunity to stabilize at a much higher number than you would than you would – than some of the assets that are recently traded in Buckhead. But given the rental rates in that, we get close to a nine on that in terms of stabilization.

Jayson Lipsey

Yes. If you think about the basis going in, and you got to spend $30 a foot on half of the building, your basis is going to go up by approximately $15 to $20 across the entire building.

Jim Heistand

At low $30 market rents those numbers work pretty well for us.

Brendan Maiorana - Wells Fargo Securities

Okay, great. And then just Millenia...

Jim Heistand

On the Millenia building, that’s a somewhat of a niche submarket. There is probably an aggregate of $600,000 square feet in that submarket. It’s right next to the Millennium Mall, which is either first or second in the country in terms of price per square foot or sales per square foot. So our interest in doing that was the land around there (indiscernible) has gotten all built out, most of it multi-family and retail. And so it’s kind of a unique submarket where if you were to have some scale in that submarket which is what our hope is, then you can really it’s a market between the CBD and where all the executive housing is in the Southwest of Orlando. It’s a very high quality asset, structured parking, I think we drove you all past that before right there on I4. So it has the characteristics we are looking for. And it will remain to be seen whether we are able to aggregate scale there or not.

Brendan Maiorana - Wells Fargo Securities

Okay, great. Thanks guys.

Jim Heistand

Thank you.

Operator

Thank you. Your next question is coming from Rich Anderson of Mizuho Securities. Please proceed with your question.

Rich Anderson - Mizuho Securities

Hey, thanks. Good morning everybody.

Jim Heistand

Welcome back Rich.

Rich Anderson - Mizuho Securities

Thank you. So first question for Jim and I guess anybody on the thought that there was nothing really more on the network that you would want to own at Parkway, but Jim at some point in your life you liked whatever assets that are still there, so what’s the difference between owning an asset that works for you all and owning an asset that works for Parkway, what do you think as the key factors that make it good for one, but no so good for the other?

Jim Heistand

Well, I think one of the things if you recall back in being private we were looking at assets, we were more of an in and out training fairly quickly type of structure with the promote in the IRR hurdle. And so certain assets we thought we can create value fairly quickly and then sell those off. I think what we were trying to establish here at Parkway is a more high quality portfolio with concentration that can withstand downturns when they come and will come just because they were happening. So we looked at assets that we think and we felt things have changed just philosophically in terms of the use of office. And so as we looked kind of where these things are going towards the future, not all of those assets fit that strategy going forward. These assets you might be able to make money on in a short period of time at that time we brought them are different than what we are trying to put together for portfolio of Parkway today. So I mean there are assets that some of them that have been sold off already, so its not like it’s a static portfolio that we can just pick and choose, lot of things have traded already as well too Rich.

Rich Anderson - Mizuho Securities

Okay. And then on the topic of dispositions, I guess you are not going to give me the markets where you think you might lower exit, but can you kind of just hypothetically describe what happened was it just purely it just got too expensive or is there something about the markets that change directions on you and hence you don’t necessarily want to have an ownership position there anymore, can you just talk about the backdrop of that?

Jayson Lipsey

Maybe I can add a little color to clarify.

Jim Heistand

We were not exiting the market.

Jayson Lipsey

Yes, I mean I wouldn’t turn this into a market exit. It maybe a submarket exit where we bought an asset in the submarket that we really, really liked, but we just have not been able to for a host of reasons aggregate scale in that market. And if we have been able to create a lot of value and lease up that underlying asset and it’s at a point where it hit the stabilization and we don’t have a clear roadmap to gaining critical mass in that submarket. It might be time to say we tried, but let’s take our profit and put it into a different submarket where we can gain critical mass.

Jim Heistand

And I think two things too Rich that we would look at and say given the return profile, we bought going in, has exceeded our expectations much, much quicker. And so people ask why do you don’t want to sell, I mean one comment if I hit my five year plan in two years I got to consider that. And in some of the cases, particularly in a point where we can’t aggregate any scale which we think really as we have said before it drives retention, it keeps our cost low and we can book a gain, but as we look out, we are not sure we could get more over the next three years by holding it, then we are going to monetize it.

Rich Anderson - Mizuho Securities

Okay. And then the game plan from an acquisition standpoint, obviously you are doing a lot of value stuff or creative stuff finding debt or whatever the case maybe, what would you say if you were to look at the – your kind of overall portfolio on cap rates on core assets, fully occupied assets. How much have they declined over the past two years in your opinion?

Jim Heistand

Well, I think Fifth Third is a good indication of that. I mean, I think when we bought first, we were buying added in place 7 at rents that were in the high 20s, okay. In Fifth Third, they had a vacancy, they had somebody who is vacating. So, those have dropped that same cap rate 4% has dropped at minimum to 6%. And there has been no leasing done during that period of time. So, this by virtue of holding on to it in cap rate compression and terms of the perception of the market has driven cap rates down. Now, I think that the reason the cap rates are going down is that people are a) believing the fundamentals have definitely improved. Rents still have a room to go before they support new development, especially in Charlotte. So, it’s an asset by asset specific, but generally they come down a pretty good percentage just in the last two years even if you didn’t add any value to the building.

Rich Anderson - Mizuho Securities

And then when you think about those fundamental improvements, you mentioned you obviously have job growth in the Sunbelt, but what other factors are driving this kind of sudden surge in office fundamentals in the Sunbelt would you say?

Jim Heistand

Well, a lot of – and Jayson you can speak to this, a lot of the shadow space has slowly been absorbed. So, now you are getting truly good absorption and in the right submarkets. And if you look around as we have said look at the submarkets that we are in they are much lower vacancy than the general market. And in those submarkets with the quality assets, it started getting into the lower single-digits in terms of vacancy you have the opportunity to drive rents. And so we just think that that the fundamentals it’s taken sometime guys, if you think about how long this downturn has been, but over the time period, things have gotten absorbed. People are now expanding for the first time. We are actually seeing bank space expanding, large major banks expanding, which we have everything in renewals for the last five years from the banks has been mostly contraction. So, now you are even seeing those renewals go on a positive absorption. So, things are hitting pretty good on all cylinders. And as we said before, some markets were doing good, a year ago. Even as we said Orlando has been an outlier. So, all of our markets we think are doing well.

Jayson Lipsey

Yes. Rich, I think that optimism around the Sunbelt has increased pretty much across the board for a variety of reasons. First, our market specifically Sunbelt markets are outpacing broader job using employment growth. We are seeing significant numbers of companies wanting to relocate to the Sunbelt, because of favorable governments, favorable climates, low cost of living, great place to new business, very friendly environments. We are also seeing very significant trend towards urban dense submarkets within the Sunbelt, because of the live, work, play environment, because of access to amenities. And what we are not seeing is significant new construction, which I think is one of the probably most important things to observe is that across our markets outside of Texas, there is really no new development right now.

Jim Heistand

Yes, I think that’s the biggest knock on the Sunbelt in the past. And the thing is what you have seen is in these more dense environments, a tremendous amount of the land has been taken up in multi-family for-sale and for-rent development.

Rich Anderson - Mizuho Securities

Right. And then I have just last question when you look at the guidance, your uptick your FFO numbers, but what about the AFFO or FAD levels considering the straight line rent uptick and also the new increased CapEx, would you say that at the AFFO level the number will be kind of flattish relative to last quarter?

David O’Reilly

Look, we don’t provide AFFO or FAD guidance. I think we try to give you the pieces of the line items that help get you there. I do think that we do have an increase in CapEx guidance. We do have an increase in straight line guidance and a lot of that is due to our performance in leasing. And to do a lot of leasing and to hit these occupancy targets despite buying vacancy cost money, so to that extent our bad AFFO could be under a little bit more pressure than this quarter and the second half of the year, but that’s truly the result of the some great news and filling the portfolio at great net effective rates.

Rich Anderson - Mizuho Securities

Like one step back two or three steps forward kind of thing?

Jim Heistand

If I have to spend a dollar that creates five of value I would do it every day.

Rich Anderson - Mizuho Securities

Okay, I appreciate it guys. Thanks very much.

Jim Heistand

Thanks Rich.

Operator

Thank you. Our next question is coming from John Guinee of Stifel. Please proceed with your question.

John Guinee - Stifel

Hi. Thank you. First a real quick any of the $300 million odd of acquisitions year-to-date setup with the ability to do a reverse 1031 exchange and then how much time do you have to execute that if that is in fact the case?

Jim Heistand

They have not been setup in that regard. And I don’t believe that the timing would have worked out regardless. And again this is all going to be depending on the timing of the sales and how much gain is embedded in the sales and whether are not we can find a replacement asset. But we are on any thing we are looking at now we are already identifying for the process. And I believe we have I think six months post sale to find that replacement property for 1031 if we don’t find one ahead of time.

John Guinee - Stifel

Okay. And then Mr. Roger has asked this question you may have answered it, but let me just clarify. If I am looking at Page 8 on your this has to do with your fee income business, if I am looking at Page 8 I can reconcile management company income of $13.6 million, management company expenses of $11.9 million or $1.7 million six month profit, but then if I look at Page 18 $13.6 million equals $13.6 million but your expenses associated with that instead of being $11.9 million as it is on the at share income statement, it’s $17.5 million what’s the difference here?

Jim Heistand

Because it was that Parkway share of G&A expenses.

John Guinee - Stifel

Okay. Got it, okay. Thank you very much.

Jim Heistand

Well, go back to Page 18 that $17.44 million shows up there.

John Guinee - Stifel

Yes, got it. Thank you.

Jim Heistand

No problem.

Operator

Thank you. Our next question is coming from Bill Crow of Raymond James & Associates. Please proceed with your question.

Bill Crow - Raymond James & Associates

Good morning guys. Couple of questions, first I am not sure if I should congratulate you on the methods or you should congratulate us, but Jim on Millenia, it’s managed by (you), it’s 81% leased what gives Parkway I guess kind of the same people, same organization, same contacts, kind of the confidence of getting that then up to 90 or 92?

Jim Heistand

That was part of a portfolio debt restructure and so it was still in that kind of never, never land of special servicing oversight, so we have found in each of the – same thing happened with one Orlando as well too that was in that same situation and so we thought as soon as the ownership changes the market recognizes that Parkway has the capital to get deals done and can get deals done because they are notoriously poor and trying to execute anything. We have seen an immediate uptick in demand and there is – we already knew there were plenty of users for that property it’s very difficult to get things done while within that special servicing.

Bill Crow - Raymond James & Associates

Okay, fair enough. I think when you were hosting your event on a Miami you indicated that critical mass done there would something like 2 million square feet, it seems like that’s going to be a real challenge given where pricing is, is that a market that you might have created some value very quickly and would consider putting into that disposition mode or is that a market that you think there are enough opportunities to continue to grow.

Jim Heistand

Let’s put it this way, if we can’t grow into it owning 160,000 square feet building wouldn’t be the ideal plan for us. So to the extent we are not able to it and we can add some value and monetize that at a significant gain, obviously it’s something we would consider.

David O’Reilly

Yes, I don’t think we are there yet Bill we have – I think we have created a good deal of value and Courvoisier already just in our ability to write great hire and start to fill space. But I am sorry I though you were talking about the Millenia building Bill.

Bill Crow - Raymond James & Associates

No I shifted over to Miami and the critical mass there I am sorry.

David O’Reilly

That’s – that was right I am sorry. That was completely something different. We still think there is an opportunity for us to gain scale there.

Bill Crow - Raymond James & Associates

Okay, alright. And then if we look at your acquisition pipeline such as are you confident that with the say $250 million of dispositions January 1 that you would be a net acquirer over say the year 2015?

David O’Reilly

I am an optimist. I mean – we can’t, there is nothing guaranteed today, but we are working very hard to execute that. So, I mean again we can’t – we certainly wouldn’t want anybody to forecast that, but I think I am an optimist or certainly I wouldn’t be in this business. What I would say Bill is last year at this time, I think we had about the same acquisition volume heading into the end of the year and probably about a similar pipeline. And within the course of 45 days, all of a sudden the Thomas merger came into fold. And when they have doing over $1 billion, none of us plan on those type of things, but I think the team continues to work hard, they continue to do their best on earth, what we think are some pretty unique opportunities to create value.

Bill Crow - Raymond James & Associates

Thanks guys.

Operator

Thank you. Our next question is coming from Michael Salinsky of RBC Capital Markets. Please proceed with your question.

Michael Salinsky - RBC Capital Markets

Hi, guys. Just in the interest of time, I will keep it short here, just Jayson, did you give an update on your two value-add leasing opportunities in Houston and Charlotte and then if you think about the portfolio for the rest of the year and into ‘15 there, where do you see additional value-add opportunities just given the momentum we have seen in pricing over the last 12 months to 18 months?

Jim Heistand

I did not give an update on those two buildings. Thank you for reminding me. Let me start with Florida North Belt, the good news is we actually did a little leasing there in the second quarter. I think we did a 12,000 square foot lease, which is not – it doesn’t fill up the 90, but definitely it gets us part of the way there. The pipeline still remains good. I think we are getting close on the couple of smaller deals there. So, we continue to operate – that’s a little bit more of a challenged submarket for the Houston market. And so the pipeline remains full and I have got confidence that our team will ultimately lease space there. At 525 in Charlotte, we continue to have some very, very good tour activity. In particular, we have had everything from 50,000 to 100,000 square foot space dwellers. And so in terms of the two buildings where our lowest occupied going forward In North Belt in 525 in Charlotte, that leaves the leasing momentum continues to be good in terms of showings and perspective deals.

Michael Salinsky - RBC Capital Markets

Okay. And then do you see additional opportunities in the portfolio right now or no?

Jim Heistand

Absolutely. Yes, I mean I think that as we look across portfolio really in addition to those two buildings, we still have opportunity in Orlando. And as I mentioned earlier, the leasing pipeline and activities picked up here, which is really good. Our portfolio here is 83% leased. So, I think that will continue to have opportunities here. I mentioned that we have made great progress in Austin, Texas. At a lease percentage at the end of second quarter of 87%, we think that, that portfolio can be significantly more leased than that. And then in Charlotte, I think overall we continue to not only have opportunity at 525, but still the Hearst Tower that building is just under 90% leased. And with us I think getting back to the PWC floors will give us a great opportunity to really start marketing that space now that it’s available and backfilling there. So, there are several opportunities for us to continue driving opportunities in the portfolio.

Michael Salinsky - RBC Capital Markets

That’s helpful. And then the second questions, you talked about Houston and the supply picture and you talked about the improvement in Tampa and Orlando. Can you just give us a sense in Austin there, how much of that supply competing with you guys and kind of what’s the leasing strategy for the back of the year?

Jim Heistand

Austin has had about 2 million square feet of development right now. Only about 750,000 square feet of that is directly competitive to us in the CBD. What’s interesting is we have been real encouraged with how that space is pre-leased just in the last few months. So, if you look at sort of the – really the three major developments in downtown Austin, two of the three I think are pretty down or close to being completely leased and one of them is over 50%. So, in terms of our ability to keep leasing space in Austin in light of those developments, it’s to be honest with you – it has been less of the constraint than I expected it to be and things continue to go very well from a momentum perspective.

David O’Reilly

Yes. I think Mike to put it in perspective, the leasing that’s been done here year-to-date on this exceeded what we had originally forecast for the entire year.

Michael Salinsky - RBC Capital Markets

That’s encouraging guys. Thank you.

Jim Heistand

Thanks Mike.

Operator

Thank you. Our last question today is coming from Emmanuel Korchman of Citigroup. Please proceed with your question.

Emmanuel Korchman - Citigroup

Hey, guys. Thank you. Maybe going back to your comments on sort of strength in the Sunbelt markets, part of that is relocation plays a lot of companies. How many of those companies are looking to take space in existing buildings, especially in smaller blocks versus making major move in building a building for themselves. So, how much of that is going to lead to new development versus backfilling the space you already have?

Jim Heistand

Well, I mean, it’s a combination of both. I mean, the best example I can give you is (indiscernible) took the one hole we had in our Cap City Plaza building in Buckhead took 100,000 square feet existing building, but in Tempe, you guys stayed far in building 2 million square feet contiguous to our properties, which is going to be a 100% owner occupied property. So, it depends on the space needs, obviously a 2 million square foot need is going to be difficult to plug into an existing property, but there has been plenty of, I mean, it offers good example that in plenty of 30 and 40 and 50,000 square foot users who are going in to existing properties. So, it’s a mix of both and what we think is important too is even in state farm, you have now taken land t5hat could have been built for kind of more spec development aftermarket as well. So, even those that are coming in and building their own building, you have the opportunity to reduce the competitive land. And then you have also got on these relocations the supporting industries in businesses that come for state farm as an example, you have got a number of people who are located in the area just as a result of that relocation. So it does have a spin-off effect as well.

Emmanuel Korchman - Citigroup

That’s it for me. Thank you.

Jim Heistand

Thanks.

Operator

Thank you. At this time, I would like to turn the floor over to management for any additional or closing comments.

Jim Heistand - President and Chief Executive Officer

Well, again thank you all for participating today and we look forward to seeing everybody here in the near-term. I know we will be out in the road a bit selling our message. So, thank you again for attending.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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Source: Parkway Properties' (PKY) CEO Jim Heistand on Q2 2014 Results - Earnings Call Transcript

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