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Parkway Properties, Inc. (NYSE:PKY)

Q2 2008 Earnings Call

August 5, 2008 11:00 am ET

Executives

Steven Rogers - President, Chief Executive Officer

William Flatt - Chief Operating Officer

Mitchell Collins - Chief Financial Officer

James Ingram - Chief Investment Officer

Sarah Clark - Senior Vice President Strategic Planning and Investor Relations

Analysts

Richard Anderson - BMO Capital Markets

Jordan Sadler - KeyBanc Capital Markets

Mitch Germain - Banc of America Securities

Chris Haley - Wachovia

Bill Crow - Raymond James

David Aubuchon - Robert W. Baird & Co.

Chris Haley - Wachovia Capital Markets

Stephanie Krewson - Janney Montgomery Scott

Jason Payne - Morgan Keegan

Matt Warshar - Stark Investments

Erwin Guzman - Citi

Steven Shecnic - Private Investor

Operator

Welcome to the Parkway Properties second quarter earnings conference call. (Operator Instructions) With us today are the Chief Executive Officer, Steve Rogers; Chief Financial Officer, Mitch Collins; Chief Operating Officer, Will Flatt; Chief Investment Officer, Jim Ingram and Senior Vice President, Sarah Clark.

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

Sarah Clark

Before we get started with this morning presentation, I would like to direct you to our website at pky.com, where you can click on the second quarter conference call icon and find a printable version of today's slide presentation. On our website you will also find copies of yesterday's press release and the supplemental information package for the second quarter, both of which include a reconciliation of non-GAAP measures that will be discussed today to the most directly comparable GAAP financial measure.

Certain statements contained in this presentation 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 such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Please see the forward-looking statement disclaimer in Parkway's press release for factors that could cause material differences between forward-looking statements and actual results.

I would now like to turn the call over to Steve.

Steven Rogers

Before we begin with our outlook and the overall economy, I would like to take a moment to thanks those of view who attended Parkway’s 2008 Investor and Analyst day in Atlanta. We certainly appreciate your time and the opportunity to share Parkway’s story with you in greater detail.

Sitting here today, it is hard not be cautious given the prices of gas upfront, housing prices, stock prices of financials and REIT’s and the generally pessimistic news emanating from Wall Street in Washington, and while we are not insulated from these macroeconomic events our company is doing okay. For the quarter our leasing has improved 100 basis points since April 1, and embedded rent growth is up 10.7% since year end.

Our operational and financial performance was inline with our expectations in achieving $1.03 FFO per diluted share and FAD covering our dividend for all of ’07 and the first half of ’08. From a capital perspective we are executing on plant sales and have refinanced are only 2008 debt maturity, with only a modest amount of debt maturing in 2009. Basically, we are holding our own in the somewhat uncertain environment. During the second quarter we completed another large step in our transformation to an operator-owner with the announcement of our second discretionary fund.

The Teacher’s Retirement System at Texas will be a great new acquisition partner in pursing 750 million of high-quality office buildings in key growth markets throughout the U.S. Texas Teacher’s Fund II is targeting a minimum leverage internal rate of return of 10%. As high leveraged buyers are forced to the sidelines, this fund will provide both Texas and Parkway a competitive acquisition platform over the next several years. Fund II will have a target leverage of 50% or 375 million were Texas contributing 70% of the required equity and Parkway contributing 30%.

We are also pleased to announce that Parkway has formed an alliance with Babson Capital management a lending subsidiary of MassMutual with pre-established terms to provide market based quotes on all 375 million of non-recourse debt over the next few years. Babson provided $290 million of first mortgage financing for us in the Ohio PERS Fund One. This alliance does not preclude us from obtaining additional market based quotes from others.

The fee structure of Fund II provides long-term recurring FFO growth to our shareholders. Parkway will realize an asset management fee of 1.25% of invested capital, property management fees of 3%, construction management fees of 4%, leasing fees paid at market based rates and the potential for incentive fees upon sale. Total recurring fee income from Fund II is projected to be in the range of $7 million to $8 million gross annually once fully invested. We believe that Fund II will contribute funds from operations of approximately $0.65 to $0.75 per share once fully invested, which includes property operating income and fee income net of additional expenses to run the fund.

Since May’s announcement of Fund II, we have already begun to underwrite buildings for acquisition. We’ve been closed on about a quarter billion dollars in offers and I’m confident that we can acquire assets in a disciplined manner and achieve results for our fund partner and Parkway shareholders.

At this time, I’d like to direct you to the chart on page eight of our website presentation which illustrates the composition and dramatic growth of our fee income stream from Ohio PERS Fund one joint venture and third-party contracts. This is evidenced by the increase of recurring fee income from both joint ventures and Ohio PERS Fund One, which is up from $0.14 per diluted share of recurring FFO in 2006 to $0.41 projected in 2008.

If you look at the chart Ohio Fund One performance, you can see the significant impact that the fund model gives Parkway in relationship to other capital allocation alternatives. Our quartered equity contribution for Fund II we are $112.5 million over the investment period. We planned to fund our future primarily with asset sales in less strategic markets consistent with plan shared with you in early stages of GEAR UP or sales and markets of properties that we believe have reached optimal values, either through significant occupancy gains or given the respective market conditions.

Examples of strategic sales include the sale of Town Point Center in Norfolk last month for $12.8 million and sale of Capital City in Columbia and Wachovia Plaza in St. Petersburg, which were under hard contracts with estimated gross proceeds of $73.5 million. We are currently estimating that these assets will close in the third quarter. Recall than in our GEAR UP Plan had Columbia and Norfolk as part of the planned sales.

We added Wachovia this year as we maximized the value by bringing the occupancy to 100%. As you would expect and Mitch will explain later in the call, these assets sales will temporarily be dilative until we redeploy the net proceeds into the Fund II. As such we are reducing our 2008 FFO slowly for the effect of these strategic asset sales and will adjust FFO as we announced future acquisitions under the fund.

Regarding our capital structure, I would like to reiterate our commitment to reducing Parkway short-term debt and our target debt level to around 50%. Our debt-to-market cap percentage has increased primarily due to the decrease last year in our stock price not additional debt. In fact our coverage ratios have remained relatively stable since June of ’07 as noted on page 24 of our web presentation.

With the announcement of the additional asset sales at a 100% ownership and redeployment of the proceeds at 30% of the required equity in the Fund II, our overall leverage should comedown as we execute the fund strategy. As to the GEAR UP plan we’re in the seventh inning and the game is still too close to call. We’ve made great strives recently and if we continue to this execution we should lead most of the goals of the plan.

Also we are right in the middle of creating our next strategic plan and we’ll release details, goals and metrics in our November and December calls. Before turning the call over to Will, I would like to take a moment to share how honored we are to have been recognized as one of the America’s 2008 great places to work, ranking 11th in the mid-size category by the Society of Human Resource Management.

Over the past several years Parkway has received a number of awards, recognitions and accolades, but I am proudest of this one it come from the heart of the company, our people and reflects a level of trust, pride and camaraderie within the Parkway team that has been built over a long period of time.

With that I’d now like to turn the call over to Will for an operations updates.

William Flatt

Our second quarter performance has remained steady across a wide spectrum of metrics. Our portfolio occupancies is up 100 basis points from last quarter to 91.3%. The embedded growth in our portfolio continues to increase up 10.7% year-to-date, to $1.34 per square foot. We renewed or expanded 99 leases at this quarter on 718,000 square feet at an average rental rate per square foot of $22.4 or a 6.3% increase at an average of $1.68 per square foot in annual leasing costs. Included in these leases are 193,000 square foot renewal in Atlanta and a 112,000 square foot renewal in Houston. These two leases represent 43% of the total renewal or expansion leases for the second quarter.

Additionally 47 new leases were signed on a 124,000 square feet at an average rental rate of $21.75 per square foot and at a cost of $4.80 per square foot per year in leasing. As seen on the chart of page 14 of the presentation, the weighted average NPV per square foot per year of all leases assigned during the quarter using a 9% discount rate is $8.60, which continues to show an overall upward trend. Customer retention for the quarter was 87%, a new five year height for the company and was 74% for the first half of 2008.

Although, we are pleased with the strong customer retention we remained vigilant and continue to proactively monitor the credit quality of our mortgage, title, homebuilding and financial services customers on a frequent basis. Included in our supplemental package and a leasing static report showing leases that have been signed, but have not yet occupied the space and will commence paying rent in the next two quarters.

As of July 14, this percentage was 92.1% and rolling forward for additional activity subsequent to the last leasing status report this number would increase 40 basis points to 92.5% today. This includes approximately 47,000 of rentable square feet of new or expansion leasing. Among this leasing there is a 77,000 rentable square foot expansion of Stein Mart and Jacksonville along with an extension of the balance of their space, which is a 110,000 square feet to 2016 from 2011.

Globally we still have a steady and active leasing pipeline across all markets creating additional new and expansion opportunities for the balance of the year. Same-store average rents for the quarter increased 3.1% to $21.92 per square foot as compared to the second quarter of 2007 and 2.7% to $21.82 for the first half of 2008 compared to the first half of 2007.

In addition to strong rental rate growth in Houston, Phoenix, Atlanta, Orlando and Memphis markets have also experienced solid inflates rental rate growth of 2.7%. As anticipated same-store average occupancy was down to 90.5% as compared to 90.9% for the second quarter of 2007 an increased to 90.8% compared to 90.7% compared to the first half of 2007.

On the 50,000 square feet taken back from First NLC and Fort Lauderdale during the first quarter, 34% or 17,000 square feet has been released. Despite of high utility costs Parkway share of same-store net operating income increased 426,000 or 1.5% in the second quarter of 2008 as compared to the second quarter of 2007.

On a cash basis same-store net operating income increased 227,000 or 0.8% from the second quarter of 2008 as compared to the prior-year. On the expense side their continue to be upward pressure on electricity costs driven by price per kilowatt hour increases, while the unit costs for electricity continues to see increases we are focusing on what we can control and that is consumption.

We continue to execute our long standing strategies to educate our customers, employees on the merits of energy conservation as recognized by our receiving NAREIT Leader Light Silver award last November. In additional, roughly 60% of our portfolio meets Energy Star guidelines. Our Houston market, which represents 16% of our total portfolio square footage, continues to be our strongest at 97.6% occupancy and had an average rental rate growth on our 18% on lease renewed or expanded in the first six months of 2008.

With nearly 50% of our Houston leases rolling in 2008 for 2010 and strong job growth to our projected net market, projected and better rental rate growth of $3.69 per square foot continues to appear achievable. Our Atlanta market, which represents nearly 13% of our portfolio, is 92.9% occupied and experienced a 1.2% increase in rental rates for leases signed in the first half of 2008 in spite of year-to-date negative absorption of 308,000 rentable square feet.

While concerns remain over the $3.8 million square feet currently under construction at Atlanta, is important to note this represents less than 3% of inventory in the rate of new starts has fallen substantially. In comparison, construction as the percent of stock rose to over 8% in 2000. Our Chicago portfolio was 92.1% occupied at quarter end, but not included in these numbers of 31,000 square feet of leases that will commence over the next two quarters bringing the Chicago portfolio to 93.1% leased.

Overall vacancy in the Chicago CBD fell 1.3% to 10.8%. This decline was a result of 650,000 square feet of vacancy remove from the market due to two hotel conversions and a positive absorption for the second quarter of 150,000 square feet. This is the lowest direct vacancy since the third quarter of 2002.

In Suburban Chicago vacancy increase this quarter to 16.6% for the overall market and to 12.9% for Class A product similar to Parkway’s. With 2008 construction in the Chicago Suburbs mostly moved into inventories there is 400,000 rentable square feet listed to be delivered, which represents less than 1% stock. Despite rise in vacancy rents have increased since the ninth consecutive quarter to $22.27 for rentable square foot gross.

Finally our Pinnacle development is 80% complete and on time and on budget. Pre-leasing is over 70% and we anticipate additional pre-leasing will result from current activity before our delivery date in mid-November. With that, I would like to turn the call over to Mitch for the financial.

Mitchell Collins

Before moving on to the financial results for the second quarter of 2008, I would like to highlight the key initiatives that will be focused on in the remainder of ’08 and in 2009. These initiatives include the continued executions of our asset recycling program, reduction of current debt levels and the prudent funding of Texas Teachers Fund II. On the disposition front, we’ve recently closed on the sale of the Town Point Center 131,000 square foot office propriety in Norfolk for gross sales proceed of $12.8 million.

Parkway’s $12 million in net sales proceeds were used to pay down the company’s line of credit. We have also executed purchased and sale agreements for a combined $73.5 million for our Capitol Center asset in Columbia and Wachovia Plaza asset in St. Petersburg with $3 million in combined non-refundable deposits. While these assets are subject to final customary closing conditions, we do expect the sales will be completed during the third quarter of 2008. These assets were sold at a combined cap rate of approximately 8.5%.

Let me remind everyone on the call that these buildings are non-core markets and are nearly 100% leased. These asset sales will help fund the future equity contribution of Fund II, additionally the company will continue to target asset disposition in non-strategic markets or add optimal values over the next few years as part of our normal announced asset recycling program. When the company projects that Fund II will contribute FFO of $0.65 to $0.75 per share- per year once fully invested.

This will be primarily funded by asset sales that will be diluted to the company in a short-term until we redeploy the funds. By selling asset at a 100% ownership and redeploying proceed into Fund II on a 30% equity basis. We believe that the overall effective leverage of the company will decrease over the next few years. Moving onto FFO, for the second quarter of 2008 we achieved $1.03 per diluted share up 9.6% as compared to $0.94 per diluted share in the prior year.

Overall these results were in-lined with our forecast and we were pleased that our leasing velocity and better rent growth continue to increase. As noted in our first quarter earnings release we incurred a $390,000 net gain on the early extinguishment of debt related to our Capital City Plaza asset in Atlanta, excluding the debt prepayment gain, FFO would have been $1 per share which would have been up 3.1% as compared to the prior year on a similar comparison basis. Please see our press release and website for a detailed table of the information regarding the unusual and other items impacting FFO for this quarter and year-to-date as compared to 2007.

Our FAD $10.3 million for the three months ended June 30, 2008 cover the dividend that were paid of $9.8 million, please note the chart on our web presentation which illustrates historical dividend covered by FAD. The company has covered its dividend in 2007 and the first half of 2008, non-revenue generating capital expenditures were $936,000 or $0.07 per square foot for the quarter. Customer improvements and leasing commissions totaled nearly $4.6 million for the quarter.

On the balance sheet, we recognized the need to reduce our debt to total market cap leverage to around 50% and believe that we have a plan in place overtime to achieve this ratio. Our debt to market cap stands at 59.8% today, given the market decline at REITs in general however, our covered ratios have remained generally in-lined with June of last year.

From a capital perspective in May 2008, we completed our only 2008 debt maturity by placing $60 million mortgage loan on our Capital City Plaza building in Atlanta, Georgia. Additionally for 2009, we have only $22 million of debt maturities related to three assets in Houston, which are currently 98.6% least.

As of quarter end the company owed $239 million related to its $311 million line of credit, the company is in compliance with all covenants into the line of credit and our line of credit does not mature until April 2011, assuming that we exercise a one year extension option. At quarter end we had $45 million in availability, before considering the asset sales discussed for the third quarter of 2008. Assuming these sales, we have sufficient availability under our line of credit to complete approximately two-thirds of the funding for Fund II.

During the quarter, the company entered into two interest rates swaps. The most important interest rate swap was with Regions Bank for $100 million that effectively fixes the 30-day Libor interest rate at 3.6%. This swap begins in January 2009 and will hedge the first $100 million under a line of credit through March 2011. The all interest rates for the company will be 4.9% per annum. The second swap is with U.S. Bank for a $23.5 million notional amount that fixes the 30-day Libor interest rate at 4.1% which equates to a total interest rate of 5.6% for the period of January 2009 through December 2014.

This swap serves as a hedge of the variable interest rate on the borrowings under our pencil development at Jackson Place, which we still intend to syndicate a portion of this project by year end 2008. On the outlook for 2008, as noted in the press release we sold one asset and anticipate two more asset sales in the third quarter of 2008. These asset sales will be temporarily dilutive to the company until we redeploy the proceeds in the Fund II. Due to some of these dispositions we are adjusting our FFO guidance for 2008 to the range of $3.80 to $3.90 per diluted share.

The three asset sales are estimated to be $0.25 diluted to FFO per share for the remainder of 2008, which includes a $0.14 onetime charge related to a debt prepayment penalty for our Capitol Center asset in Columbia. Excluding this onetime debt prepayment penalty, our 2008 FFO range would be estimated at $3.94 to $4.04 per diluted share. Please also note that this guidance does not include any other asset sales or any acquisition that may occur with completing Fund II. Our internally measured NEV is $52 to $42 per share based on the 7.5% to 8% range of cap rates, which we believe is reasonable based on what we are seeing today.

With that, I would now like to turn the call back over to Steve.

Steven Rogers

I believe that our press release and call notes tell you we are executing on our plan, funding our future and creating FFO growth with our new $750 million discretionary fund and with that we’ll be happy to answer any questions that you may have at this time.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go to Rich Anderson of BMO Capital Markets.

Richard Anderson - BMO Capital Markets

Just to clarify, there will be no Parkway assets sold to fund two, is that correct?

Steven Rogers

That’s correct.

Richard Anderson - BMO Capital Markets

You talked a lot about de-leveraging of course and you mentioned the 50% target, which is obviously the moving target given the stock price; what would you say your targets fixed charge coverage ratio is?

Steven Rogers

We really monitor most of which is our modify fixed charge coverage ratio and we would like to be in around the 2.3 ex-range and we’re a little short of that today, but I think we’ve noted that and have a good plan for coming back up to that level as indicated by these planned asset sales that we believed we would do even back as far as the May call and the analyst meeting in Atlanta, but just had to wait until we got some earnest money earned before we can announce them.

So, I think we’re heading back in the right direction with that and especially once we get the Texas Teachers investments made, because Texas Teachers if you think about it there’s round numbers, around $0.70 of accretion and a $750 million fund. Then every $100 million of purchases that you make is about $0.07 worth of accretion. So, just that it shouldn’t take long for us to be in a position where we’re building back up that coverage with good accretive asset purchases.

Richard Anderson - BMO Capital Markets

Mitch you said that the guidance was down solely to disposition, but didn’t your occupancy forecast decline from the first quarter?

Mitchell Collins

Well, let me give you some color point on that. We started out the end of last year with about 92.9% occupancy target. We revised that down to around 92 in our first quarter call and made commentary of that in our Atlanta Investor Day conference with everyone. We’re now using a range of sort of 91 and 92 reminding everybody that we’re planning to sell three assets that we’re nearly a 100% lease. We see that clipping us about 25 basis points down in the second half of the year.

So yes, Rich the big picture take-away is we do attribute the decline. We also made a point in the first quarter call Rich, that we did purchase; I think it was about 40 bps in vacancy on the first half of the year, but the big picture take away is -- the quick math is we’re calling it a quarter $0.25 down, that’s $0.14 on debt prepayment, $0.11 on the operating side and if you do that mechanically up of what we had originally out there you’re at 395 to 375 at a low and then since the second half of the year we felt like tightening that range, so we raised the bottom end a nickel and we lower the top end a nickel to get to a $0.10 range of $3.80 to $3.90.

Richard Anderson - BMO Capital Markets

So the occupancy decline as a function is interrelated with the disposition?

Steven Rogers

With the sales; primarily we bought vacancy, we sold occupancy and so the slight drop in our forecast for occupancy is immaterial and this is solely due to the sale of the three planned assets sales that were previously announced that we are going to do, but now we are giving you the results now that earning this money is hard.

Mitchell Collins

And we are tightening the range from $0.20 to a dime.

Steven Rogers

Tightening a nickel in each side could be just closer toward the end of the year and we believe that we’re able to do that at this point in time.

Richard Anderson - BMO Capital Markets

Now you have these assets sales in your guidance right now and obviously again to the point of debt reduction; would you say that this will be the extent of the asset sales for 2008 or do you foresee maybe adding to the pipeline of asset sales before the year closes out?

Steven Rogers

That’s a good question. We are reexamining a lot of buildings right now and making sure. We came up with a list of buildings at the beginning of our gear-up plan that was a pretty long list of buildings that we wanted to sell, all for strategic purposes and we made some of those sales. I think we are up to about to ten of those sales now and we did make a couple that we’ve also announcednow and we didn’t make a couple that we’vealsoannounced, but we’d like to continue to reevaluate the balance of those eight or nine assets and when they get to be fully leased and we think conditions are right, then maybe go back out and over a measure period of time sell a few more.

I don’t think really anything else is going to sell in ’08 with the possible exception of one assets in Atlanta that we’ve talked about; we’re not prepared really to go into any detail on that today, but we are out there in the marketplace with one more building and depending on how things go and we’ll just decide once we get numbers and get in front of our board and things like that as to whether it’s a sale force are not.

Richard Anderson - BMO Capital Markets

Okay and then my last question is, when I look at that chart on your presentation you have embedded growth that Will you were referring to. The embedded growth chart that you show on slide 15 or page 15 that to me when I look at that visually it seems to be obviously flattening out for you so do you have any sense of what the next version of this chart will look like, maybe a year from now. It seems like the only place we are going to go at this point is down and how might that impact your same-store results? How are you managing that embedded growth issues since it looks like it might start to deteriorate on you?

Steven Rogers

Let me point like just an optical point of the chart, I’m trying to make sure we’re putting useful information out is that the left half of the chart from 01.01.08 back is on a yearly basis and the right half of the chart is on a quarterly basis. So, again I think that your point is still relevant, but I also want to make sure that this sort of incremental time period is going to be smaller, because it’s a smaller time period. So just keep that in mind when you’re looking at that.

With that and I figure today, I think that we’re still seeing upward pressure on rental rates. Where it goes a year from now, I don’t know. I think that if you just sort of read the economic headlines and the settlement at least in the troughs and in other areas you would think that they were going down, but as we sit here today, we’re still actively seeing an upward pressure on rates.

We’ve always commented in terms of directionally where this chart might go; the best indicator that we’ve come up with is some fact fraction of replacement costs and so if you believe that the peak of rental rates in any one cycle is going to be some function of replacement cost rents, I think there is directionally more to go; how much more I’m not going to say today, I don’t know but more to go.

Operator

We’ll go next to Jordan Sadler of KeyBanc Capital.

Jordan Sadler - KeyBanc Capital Markets

Steve could you maybe just characterize the quality and caliber of the mini portfolio that you sold or have contracted to sell relative to Parkway’s overall portfolio format for us?

Steven Rogers

Sure. First of all, I think it’s important to note and I think Mitch did in the call notes that it is a 100% leased product that we’re selling and in the Presidents letter that I pinned down in February in the annual report, I noted that we’re just going to focus and bifurcate our portfolio into fully-leased product.

We had enough fun in 2007 trying to get portfolios out the door that had some partially leased assets in there and the market just changed in 2007. Jordan to a point to where unleased product, we were given no credit for vacancy; in other words, a big change from say late ’06, early ’07 where people wanted to buy vacancy and it just took some trial and error in ’07 to gain that appreciation, but we did gain it. We learned from that and in ’08, all that you’re seeing us go to market with is fully leased product and I’m talking about a 100% lease stock. Therefore, one should expect the cap rate should be higher and the un-leveraged ROR, should be marginally lower.

On the quality, I think what we decided to do are to sell those assets that really don’t fit any longer with Parkways just so to find quality standard and you know and I don’t think its any secret to anybody listening to the call today that we picked four, five markets and the buildings in those markets where we believe that we are not going to make any further investments and therefore we’d like to over measure a period of time to divest ourselves.

So, again as you’re sort of analyzing cap rate you should look at we’re selling non-strategic CDs with assets that probably do not show as much growth for the future that are now currently 100% leased and that will drive the economics of those sales.

Jordan Sadler - KeyBanc Capital Markets

And what did the bidder list look like on Wachovia Plaza and Cap Center?

Steven Rogers

Look I got to tell you; I mean the bidder list on Wachovia was robust and little less robust on Cap Center. We obviously went through a national brokered process as we always do to sell something and I don’t know if it will be violating, I think we had about 15 offers on Wachovia and I’d say 15, Jim’s sitting next too me nodding.

I’d say there were four or five good offers and we picked the two best horses and we’re not ready to disclose all of that yet because the closing will take place in the next few weeks or so, but we will in the press release and when we get to that point you’ll see more detail on it, but the process is working out there. We are not getting every dollar that we’d like. I think generally characterize it as a buyer's market today rather than a sellers market, but in a fully marketed world you’re getting reasonably close to your prices today.

So, again I’m going to flip that around as a buyer in the $750 million fund, we probably ought to do a little better then what I’ve been projecting to you. So, we just have to see on that, we’ll have to show you the money, so to speak, we got to get some closings done, but I feel good about that because we’ve made about a quarter billion dollars worth of offers and we were in touching distance of every dollar that we offered; meaning we could have had it and one of them we actually did win it but the seller and the insurance company decided not to sell the assets.

So, we won and they didn’t sale and the other two we were very close to making it work and therefore I think we’ve established our economics in the marketplace, that’s why I’m confident we can make the investments.

Jordan Sadler - KeyBanc Capital Markets

And the bidders on the portfolio assets you sold though are individually going for financing and was that a factory whatsoever?

Steven Rogers

Absolutely; in the interview process and again Jim you want to describe that I mean anybody who needed a mortgage got ex-ed out of the equation.

Jim Ingram

Jordon this is Jim Ingram. For Wachovia Plaza as Steve mentioned we had 15 to 16 offers in the initial round, got that down to a good top six for the best and final and during those buyer interviews we did take out the buyers that were absolutely subject to getting financing, but on some assets and the smaller markets buyers are going to put financing on these so you just have to pick the best buyer that you can through that interview process.

Steven Rogers

Generally if they have well established relationship with the insurance companies and can quote those companies to us like we have with the insurance companies in Parkway and we know all the guys of these insurance companies because we borrowed from them all and we feel good about those guys. If they say “well, I need a CMBS loan or something” I mean forget it, they’re not getting. We just stop the conversation at that movement.

So I think you end up calling it down to a list of very qualified smaller buyers that are lower leveraged than what we saw obviously in ’06 and early ’07 and the guys are just having to raise a lot more equity. So their equity needs a high yield and that’s what’s putting a little pressure on the pricing.

All that matters is I think we’re know to everybody on the phone, but we’re still able to make sales I think is the real message here and I think the company is doing what it said it was going to do; we’re making some sales like we told you we we’re going to do a couple of years ago, just a little delay in finishing what we said we’re going into.

Jordan Sadler - KeyBanc Capital Markets

And then cap rates on the sale you said the average was an 8.5, how was that calculated and could you maybe give us the range of the three rather than giving us individual cap rates?

Steven Rogers

I think what’s you will see is on each press release you’ll actually get a cap rate from Parkway and that I’d rather wait until we do the press release, until we have a closing if you don’t mind, but the one that we have press released already was Town Point Center in Norfolk and that was a 7.9 cap and the way that’s calculated is on a forward-looking cash NOI basis; in other words if you got a closing set for June 30 ’08 than July 1 ’08 through June 30 ’09 of fiscal year ’09 if you will is how we run the mathematics on that.

Jordan Sadler - KeyBanc Capital Markets

Okay last question for Will. DHL looks like it’s coming up at the end of the year. Can you give us some inside into where market rent for that space would be and whether or not they’ve indicated or have to indicate to you whether or not they are going to renew or vacate at this point?

William Flatt

We are in negotiation with DHL today and they have been in the building for a very longtime and I think that all indications sitting here today would be that we would be able to keep them in the building to our single biggest for the balance of the year in about 200,000 feet and so I expect to keep that renewal Jordan.

Jordan Sadler - KeyBanc Capital Markets

Okay and the market rent you quoted, the embedded rent in Houston would that be consistent with what’s probably achievable here?

William Flatt

I think so; again taking in all factors whether or not there’s a broker involved, but I think that it’s going to be -- that building is on the higher end of our Houston rent, but I would say that the rent sort of quoted there is a good one.

Operator

We’ll go next to Mitch Germain of Banc of America Securities.

Mitch Germain - Banc of America Securities

Steve, did you quote what the LTV was on the assets that you have for sale right now, what the buyers target was?

Steven Rogers

Would you repeat the question?

Mitch Germain - Banc of America Securities

The loan-to-value, what the buyers on Wachovia Center and Cap Center, do you know what they have as targeted?

Steven Rogers

We do not, actually we just won’t know. I do not know what the LTV is. I’ll guess probably 60% just guessing.

Mitch Germain - Banc of America Securities

And just more broadly, commentary on the markets, I know you historically put a schedule and chose vacancy rates for Parkway versus the markets that you’re in; just if you can Steve go over kind of the markets that have had the largest moves in vacancy, over the last quarter?

Steven Rogers

I’ll pass that one off to Will.

William Flatt

Sure, I think you’re talking about the market as a whole or in our portfolio?

Mitch Germain – Banc of America Securities

Market as a whole.

William Flatt

I think that clearly the first one that comes to mind is Phoenix. We’re just sort of seeing a significant increase in both delivery and sublease space increasing in that market number and despite that we have a couple of either closed LOI’s or leasing of some large leases in Phoenix, so we’re still seeing activity, but I would say that whether or not this quarter sort of we’re showing up to 16.3% for Phoenix. I don’t know where that was last quarter, but just off the top of my head I think that’s the biggest increase and then probably followed by Suburban Chicago with a couple 100 basis points in the sub-urbs.

Operator

We’ll go to Chris Haley of Wachovia.

Chris Haley – Wachovia

I wanted to make sure I had this quote correct; is that there was a vary of bidders for Wachovia you meant the building, right?

Steven Rogers

Yes, I’ll stand corrected on that clarification Mr. Haley. Wachovia flattens year-over-year.

Chris Haley – Wachovia

These transcripts get around pretty quick. Well I just have your same-store expectations for the full year are above inflation, is it fair to say that same-store for the rest of the years is going to be below inflation?

Steven Rogers

I do the read the notes every night Chris before we get here, so I did see that. I think that I don’t have a digested answer today on how it compares to where we were because of the assets that are coming in and out of the portfolio. I would say that just sort of my read on it, we are having sort of same-store -- we gave you a same-store average occupancy for the quarter fast forwarding we’re ending the quarter at 90.84%. So, I think I gave you 90.5% was average and so the ending was close to 91% just to read into that, so I would say that it is positive and it’s probably going to be slightly below inflation sitting here today, Chris.

Chris Haley – Wachovia

And just an observation; with all the sales that are going on as you’re trying to reduce leverage, I know you’re doing the best you can covering your 13 or 14 years, you do a very good job in terms of disclosure and given your outlooks, but given the turnover of the portfolio, I’ll say this and I’ll probably regret it later, but you may want to pull back given the amount of turnover that’s occurring in the portfolio regarding setting guidance expectations, NOI expectations and just given the range of where you think numbers will be in terms of the overall and say there is a lot of flux or these to widen your same-store range, but then what we’ll do is we’ll pick it apart and say that that’s not correct and your numbers got to be lower etc, etc, just an observation.

Steven Rogers

That’s a point well taken. I think that we are certainly well inside the ranges we establish at the beginning of year on FFO and even with this quarter, I mean the initiation of FFO solely due to assets sales and the tightening, I feel very good about where we are. You’re right, the same-store NOI driven by maybe the lower occupancy as a result of some of these sales and purchases could lead one to pick on this a little bit or even be confusing in there, so point well taken.

Chris Haley – Wachovia

If I do the math and if I assume that your same-store was going to be above inflation three to five, I think which was your original quote and you’re selling these assets and your same-store has to come down or occupancy expectation are down a little bit, that would implied then that the same-store of these asset that have been sold are above the same-store expectations of the other remaining portfolio.

Steven Rogers

Well but for one fact and that is that our embedded growth is actually higher than we were projecting at the end of the year. In other words revenues as a function of occupancy gain or loss and rent rate gain or loss and so all we really seem to be focused on right now is we’re down a little bit on the occupancy side, but yet we’re actually showing higher embedded growth in our company today, than we projected at the end of the year last year. Therefore the revenue number, which is obviously a huge component of the same-store calculation we’re still sort of holding our own.

Mitchell Collins

And on that Chris I’d like to comments is that one out of same-stores, we didn’t expect was the personnel lease in Fort Lauderdale for $50,000 and then I think the other number just on the net operating income side would be really where utility costs come in for the balance of the year. In terms of my thoughts on projection as we saw a rapid spike in natural gas about the time we were finishing our budgets and that’s come off some and I don’t exactly know where it will end up, but I think that’s probably in the uncertainty, that we’ll be able to see. There’ll be an inflation of the under inflation.

Steven Rogers

And I think we generally capture that in our FFO range because we give a dime off our budget so to speak or give a range of 400 to 420 and that’s ample to take care of 1% natural gas prices or one bankruptcy of one customer, we’re still well within that range on either side of the number. I think what your commenting more is towards store-same NOI occupancy and we’ll take a look at it.

Chris Haley – Wachovia

The capital expenditures on your fund investments, is your share of building improvements and leasing commissions and tenant improvements; is it continuing to be disclosed in your reconciliation of FAD, CAD, whatever you use?

Steven Rogers

Yes. Short answer, we can direct you to a page on that. I have forgotten, Mitch have you got that page number?

Mitchell Collins

9 of 30 is going to show you the FAD break.

Steven Rogers

Page 9 in the supplemental. Break it out of our proportion of share Haley.

Chris Haley – Wachovia

And then on the sales, I’m just trying to move into a leverage question; these sales what do you think the net cash will be coming to you after the third quarter sales?

Mitchell Collins

Well $85.4 million right in there.

Steven Rogers

Then we’ll pay off our first mortgage and we've got a debt repayment and net down in the line is going to be 64 and some change 64.5.

Chris Haley – Wachovia

Okay, so in the prior lease are obviously investing with the Texas fund and then secondly reducing leverage. So could you give us a sense how much more in term of assets either in dollar terms, preferably in dollar terms that you might have to reduce your asset base to move down to a leverage ratio where you feel as though you have a fair amount of optionality.

Steven Rogers

That’s a good question; let me try to take that one. You’ve got the priority straight. We want to make sure that we demonstrate. We’re totally confident and convinced and mathematically can show we’re perfectly in great shape to cover Texas today. However, I think and then reasonably there is caution and skepticism and what we’ve elected to do.

I think hopefully we’ve communicated this well in February, May and this call is we’ve elected to go ahead and get some assets sales done that were part of our already pretty existing assets plan sale program and to just go ahead and “put the money in the bank.” In other words, even through we’re not going to have one building under contract today in Texas, we’re going to put $112.5 million in the bank.

Then with $112 million it’s kind of hard for somebody to answer that you can’t take care of your obligation which I’ve never worried about, anyway but people are worried about and therefore I need to be a good listener, so once that is done that only takes about $40 million more dollars Chris. At that point it’s just a judgment call as to how much more we want to pay down to take care of what we feel comfortable with of reducing our debt on the line of credit, so that we bring our leverage into a normalized range in Parkway.

To be blunt and honest with you about it and we’re going to need a little stock price pick up to help in that area. I mean you can’t drop 20 bucks of your stock and keep your debt-to-market cap at the same ratio unless you pay down about 40% of your debt in an afternoon. So what we look at coverage ratio as we turn on page 24 of your chart book and I think we’re doing fine there; that’s what I’m really managing right now.

I would like to get the debt-to-market cap down to 50, but with the stock price, a crummy, lousy, unacceptable stock price of 36, it’s going to either take some stock price pick up or it’s going to take some time and we’re willing to just let everyone on the phone knows that it’s a goal of ours, we’re committed to it, we’re showing tangible results in that area, but priority one, is to make a few assets sales, fund Texas because it has significant accretion over $0.70 and once that’s done then make the decision of where we are in the balance sheet and the line of credit and trigger smaller individual sales that help us to manage that in a very measured way down to a level we want to be. Long ended answer, but did I answer your question.

Operator

We’ll go next to Bill Crow of Raymond James.

Bill Crow - Raymond James

Forgive me, if you’ve answer this; I missed a little bit of the call, but how do you want us Steve, to think about putting this Texas money to work. I mean this is a four quarter process and I know you are close to a bunch of transactions, but for modeling purpose how do you want us to think about the timing of that investment?

Steven Rogers

First of all no one else has asked that question, but had they asked it, I would answer it again because I like that one and I want to make sure, I get a chance to answer that one. We’re going to take some asset sales and de-lever the company and temporarily bring down our guidance from the range we’re at to where we are. That’s about $0.23 kind of on a run rate; if you pull the $0.14 prepayment penalty out and run it for a whole year.

Then let’s say we do maybe one more sale, okay and that pulls it down a little more. In other words we de-leveraged Parkway and put the $112.5 million “in the bank” that everybody would like to see us have cash under the pillow, so we’re going to put cash under the pillow and at that point then we are going to re-leverage to a level that’s acceptable based on the acquisitions. So, you might come down say whatever the number ends up being; 30 something on the asset sales and maybe add the $0.70 once fully invested.

Now, we want to add $0.70 to day one, because we can’t get it all done day one, but I wouldn’t assume four years. That was just a point we negotiated to make sure that we were flexible and disciplined with our partner. It had nothing to do with our expectations of when we’re going to deliver this investment. We are looking at a lot of stuff today guys and there is some portfolios out there and we’re talking to principals and principal-to-principal portfolio discussions could result in some speed at which this goes forward and I’m careful with the word because I don’t want to get anyone impression, we’re going to loss the discipline, that’s not going to happen.

I think we’re going to better for our partner and for our sales and what we originally projected based on what I’m seeing out there today. So, I think you just have to make at this moment Bill, make your own judgment of when we’re going to do it; four years is way too long.

Bill Crow - Raymond James

Four years is too long, would it be safe to assume that its modest negative next year relative that you don’t get enough invested I guess that in one year to offset the dilution from the asset sales?

Steven Rogers

That’s a good question. I don’t think we’ll get it all invested. I think the working assumption would be as we don’t get it all invested in 12 months. I think that’s just a fair assumption.

Operator

We’ll go next to Dave Aubuchon of Robert W. Baird.

David Aubuchon - Robert W. Baird & Co.

First well on the DHL lease, the supplemental shows 101,000 square foot expiration; I believe you said 200,000 square feet, when you are talking about that; is there different?

Steven Rogers

That’s a good catch. Let me look at it. I’m sorry if I said 200, it’s 101.

David Aubuchon - Robert W. Baird & Co.

Okay. Can you talk about three other big leases that expire in -- I know we’re still in mid ’08, but I’m sure thinking about these leases; 190,000 square feet with the GSA, 200,000 with Neighbors and 111,000 with Honeywell; just kind of initial thoughts?

Steven Rogers

Sure, I would say that all of those are similar to my comments on DHL, which is they’ve been in the place for a very longtime and they’re in good buildings today and they’re fully using their space and so that’s about as much as about as I do in terms of that probability at this stage in the game.

I would say that we are as you would expect are in discussions with all of those folks and that inclination here is that they will stay where they are and so I think given Houston’s strength today those big ones are at Houston and so clearly there is an opportunity to make a deal there; again I think with the better rent we have and then in Chicago. I think a big GSA lease is something that’s going to wait for the next President of the United States. That’s a big GSA lease and it comes up pretty quickly. I think that is a pretty good probability.

GSA historically has a very high -- just outside of our lease here I think they’ve renewal probability as next at the 90% and so that would be the best indication I could give you here today and you known what we know.

David Aubuchon - Robert W. Baird & Co.

So, the GSA lease is early in ’09; is that what you refer to?

Steven Rogers

I think it’s actually in November. We’ll check that while we’re sitting here, but I think it’s in November.

David Aubuchon - Robert W. Baird & Co.

And relatively Houston exposure markets doing well; I guess from a macro perspective any concerns about supply there and the potential of losing these tenants to new supply?

Steven Rogers

Again if you’re going to look for a silver lining in the financial crisis; I think that there is development downtown. The last number I saw was about 4% of stock and 2% of that was downtown and so there is construction but I think that it’s very modest. So, I would say that Houston is a strong market today.

I don’t know how to say it, to reiterate if you got to have a renewal coming off in Parkway Properties today you want it in Huston Texas and we got two big ones coming up it and actually create an opportunity as we try to reconstruct and make sure that our embedded growth is realized. We actually need to convert some of these major customers on the embedded growth chart to realize our embedded growth.

So, while we got embedded growth, you want to make conversion your highest priority and we now have in Houston opportunity with expirations as well as very high embedded growth and very low relative construction, so might take on it.

Operator

We’ll go next to Chris Haley of Wachovia.

Chris Haley - Wachovia Capital Markets

So I’ve got $0.12 to $0.13 of later 2008 dilution per share from the sales mix and you’re assuming that these hot at the end of the third quarter or middle of the third quarter?

Mitchell Collins

Actually towards the end of the third quarter there is a -- let me walk you through the math again. There is a $0.25 in total, $0.14 on debt prepayment, there is residual $0.11, there is sort of eight to nine that’s recurring FFO and $0.02 of breakup cost to sell those assets that we’re including in that FFO right now.

Chris Haley - Wachovia Capital Markets

So $0.08 to $0.09 a share roughly per quarter?

Mitchell Collins

Yes and so that’s how your getting sort of the $0.23, $0.24 for the year, these are assumed to be sold September 1.

Steven Rogers

Yes you have four month remaining in the year and so it’s only multiplied times three and it’s three times $0.08, that’s where I got my $0.23 number that Mitch is rounding to $0.24. So annualized impact should be $0.23, $0.24 until reinvesting.

Chris Haley - Wachovia Capital Markets

I’m sorry; $0.25 is the midpoint reduction in your guidance is that fair?

Mitchell Collins

Correct.

Chris Haley - Wachovia Capital Markets

$0.13 to $0.l4 is the cash impairment charge or probably cash extinguishment?

Mitchell Collins

Yes, prepayments $0.14.

Chris Haley - Wachovia Capital Markets

$0.14, okay so $0.11 of FFO per share impact.

Mitchell Collins

On ops for ’08.

Chris Haley - Wachovia Capital Markets

For ’08 okay, and then $0.08 to $0.09 ongoing FFO per share.

Steven Rogers

Over that four month period if you wanted to go to the annualized method. If you want to annualize it, you don’t annualize $0.11. You only take 0.11 and multiply times three and get 33; you take point 0.08 and multiply it times three and you get 0.24 and we can reconcile why $0.11 is 0.08, if you want to. It’s probably just way too much detail for what we’re up to today, but we’ll certainly get that.

Mitchell Collins

There’s some breakup costs in selling these assets and some things and that’s why it’s not recurring, but it’s in the 11.

Steven Rogers

But we’re trying to get it to you, so you can make your assumptions about the future here. So of course we’ll give you the number in November 5 anyway. If you want to do it between now and then, we’ll try and get it to you.

Chris Haley - Wachovia Capital Markets

Okay, the other item related to that is as part of your GEAR UP plan you have a three year FAD goal of a little over $7 of share. How do you think about your expenditure requirements, your gross capital expenditure requirements for the full year 2008 and into 2009?

Steven Rogers

Well I haven’t thought about all of that and for 2009 to be honest with you. We’re working on our model and plan that follows GEAR UP and we’re looking at it kind of from a macro level, but not getting any great detail. We’ll be doing our 2009 detail budget here starting in August and we’ll submit it to our Board of Directors in November and we’ll kind of give you that on the December call.

As to ’08 we’ve got a pretty clear picture of where we think we are going with that and like I said in my comments, it may sounds a little bit like a hedge, but I’ll say we’re in the 7th inning stretch in the game and the game is a little too close to call. So, in other words I’m not saying we’re north or south of 718 today because there are few moving parts still to play out here before we have to make that call and Chris I’ll be honest with you, I probably don’t know if we’ll be able to make that call until November. Just too close to call.

Operator

We’ll go next to Stephanie Krewson of Janney Montgomery Scott.

Stephanie Krewson - Janney Montgomery Scott

A bunch of my questions are answered, but I just have some nit-picks. If you want to answer some of these offline just let me know. On page 19 of your supplemental; buyout center, that was sold back in June of ’06, how was their revenue and net loss from it this past quarter?

Steven Rogers

I know they won the net loss. I’m going to answer that while Mitch and Will are looking up the detail. There was a very large gain from the YAD as well as an incentive fee paid to Parkway that was I think $3.4 million; can you answered the question Mitch.

Mitchell Collins

I’ll pop my head in and tell you there was a land sale closing of am imminent domain that I think is sort of come over into that and there maybe some receivable balance, but I think it would be best that maybe one of those two things, receivable write off and then I think this lands sell closing and related legal expense maybe in that umber.

Steven Rogers

The condemnation of some street in front of the building.

Stephanie Krewson - Janney Montgomery Scott

And second question, can you break out the 306,000 of your interest and other income? Specifically what was your cash interest income and what was the amortization of your bps, would you want to do that offline.

Mitchell Collins

Yes, I think we’re going to do that offline. I don’t have that right in front of me here.

Stephanie Krewson - Janney Montgomery Scott

Okay, third because of your asset sales, can you provide guidance on your straight line rent adjustment for the third quarter and then more importantly for the fourth quarter sort of a run rate for the quarterly straight line rents after that?

Steven Rogers

We’ve generally are not giving quarterly guidance it’s just a general rule.

Stephanie Krewson - Janney Montgomery Scott

I know, but I’m asking.

Steven Rogers

No. You can’t blame me for that, but I don’t know; I don’t think its material at this time. So I wouldn’t mind answering that question maybe again offline.

Stephanie Krewson - Janney Montgomery Scott

Sure, no problem and then just to make sure I have this right, the amount that you have; your CIP on your Jackson Place is around sort of 80% of completion, so it’s around $39 million that has been spent?

Steven Rogers

It’s fully funded. I mean we’ve already put the equity into the building and the loan is placed. All we’re doing is just drawing on the loan now. We’ll eventually be at $48.5 million on it on or about November 15. There could be some delay as we hold back retainage of a certain percentage of the like, but by year end it’s going to $48.5 million and it’s fully funded.

Stephanie Krewson - Janney Montgomery Scott

And then two more quick questions; I know it’s a small number, but you stopped providing the composition of your management company income, the $410,000 for example in the second quarter, did I miss it or is it somewhere else in your disclosure; just what’s recurring, what’s non-recurring?

Steven Rogers

You might know the answer to that, when I probably do not.

Stephanie Krewson - Janney Montgomery Scott

Once again you guys can circle back with me, if you want.

Mitchell Collins

We have run at a two very small rentals like five grand.

Steven Rogers

Why don’t you let us figure that one out? I can assure you it’s not -- that that just became anonymous and I think it just got taken out.

Stephanie Krewson - Janney Montgomery Scott

Okay and then last but not the least, looking at your first quarter 10-Q on page 27 of that, your line of credit, liquidity and capital resources discussion, two of your lines, the $9 million unsecured line and the $15 million unsecured line those mature very soon. Should we really consider you’re line of credit capacity, commitment rather $311 million or should we subtract that $26 million out of the $311 million, either way it’s doesn’t impact your dividend pay or bill or anything?

Steven Rogers

Both of those are imminently renewable.

Mitchell Collins

One is a working line of credit with PNC and the other is a line of credit to a loan based on a garage we developed here in Jackson that we did with the local bank and allowed them to make some community reinvestment funds and so…

Steven Rogers

I think they still want to continue to do the loan and we’ve just been doing a year-to-year renewal and a $9 million loan for CRI purposes. They would be happy to pay it off and replace but they like to continue the loan relationship.

Stephanie Krewson - Janney Montgomery Scott

Okay. So, we should assume one year extensions on that.

Steven Rogers

I would keep it at 311 if you know because 311 is a number we sort of back into Stephanie as being the overall line of credit and with that one being secured by an individual assets, it’s still a good loan.

Mitchell Collins

Both of those banks are in the overall line of credit.

Steven Rogers

So, they know that we could just replace in our bank line if you wanted to do it that way and put that piece and its collateral and therefore improved the pool and therefore be fine with everybody but they continue to ask us to keep this loan.

William Flatt

There was not anything otherwise that would not continuing.

Operator

We’ll go next Jason Payne of Morgan Keegan.

Jason Payne - Morgan Keegan

I just have one quick question left; a clarification point. I went through your press release and I see 99 leases were renewed or expanded representing a 6.3% increase in average rent. I wonder is that a GAAP number or cash number?

Mitchell Collins

Let me see where you are? You’re new and expansion leases?

Jason Payne - Morgan Keegan

Yes.

Mitchell Collins

It’s should be I think its – “minor leases were renewed or expanded at 60.3% increase,” that would be on a cash basis.

Operator

We will go next to [Matt Warshar] of Stark Investments.

Matt Warshar - Stark Investments

I was wondering; you stated that your internally reviews from $42 to $52; I was just wondering that the higher range, the $52 range what cap rate does that equate to?

Steven Rogers

That is a 7.25% to an 8% range. I think Mitch may have said 7.5 but our mathematics on that our 7.25 would be the low cap that would derive the higher number.

Mitchell Collins

And just as a reminder what we’re capping is our ’08 budget. So, we’re not doing a 12 month forward looking, so there is some historical as we go into that just for these purposes here to make sure that we can keep a consistent budget for the year as we cap out of our budget and so if you really want to do a true operating cap rate you would start at some months and go 12 months into ’09, so again we’ve always done it that way, so that’s definitely not changing. I just want to make sure that we’re clear.

Steven Rogers

Yes there is no lease up or cap rate.

Matt Warshar - Stark Investments

And are you guys seeing any trouble or do you think you’ll see any trouble with the amount of construction coming online in Houston. Do you have any trouble re-leasing any of your properties?

Steven Rogers

Well, it’s always challenging to re-lease properties, when you lose somebody, but again as we commented earlier right now we’re running an awesome customer retention rate in Houston, because people are really more interested in piling money into their bank account over there than they are moving.

So people are staying and their rents are going up and there is some construction over there, but it’s not to bother some number. I mean 4% of stock, that’s about half of Washington DC to put it perspective. It’s just not that bad; Atlanta was 8% in 2000 to put it in perspective, San Deigo runs 6%, 7%, 8%; I think Manhattan maybe up probably at those levels. So, it’s just not a big percentage of the office stock that Houston has.

Matt Warshar - Stark Investments

Okay and I’m just curios. If you think that the NAV is 35% to 50% premium of the current share price, don’t you think that it would be in the best interest of the shareholders to liquidate the portfolio immediately. I mean I think if you asked your top 10 shareholders I would guess that everyone of them would take a 48% premium to current price.

Steven Rogers

They might and the thing about an NAV is it is a range and it takes a lot of things into account and so you just sort of look at it and it’s a good data point; it helps us with our decision-making and we shall just use it that way.

Operator

We’ll go next to [Erwin Guzman] of Citi.

Erwin Guzman - Citi

I’m sorry if I missed this and you may have mentioned it earlier, but embedded in the new guidance, how much accretion if any from acquisitions at the Fund II over the next six months?

Steven Rogers

Zero.

Erwin Guzman - Citi

Zero?

Steven Rogers

Yes, that means we won’t do any; we’re just not putting any in the guidance.

Erwin Guzman - Citi

And my other question is just if you could talk a little bit about your experience in selling the assets. I’m just wondering how the lack of secured debt on the assets have that sort of factor into your discussions and if you had to venture a guess as to what the evaluation would have been if they were say 50% leveraged and that leverage carried over to the buyer?

Steven Rogers

The CMBS market’s out, but it doesn’t mean the debt is out. All it really means is the insurance company and regional banks are providing funding for the smaller fully-leased assets. So, like I was describing earlier, you may have missed this part, in ’07 we took some buildings out to market that the portfolios that were larger that had some vacancy and we learned from that that the buyers in the new order were going to come in with lower leverage and they actually went smaller.

So we bifurcated our portfolio into 100% lease buildings, better in that strategic sale list and buildings that they lease up. We’re going to take up the lease up buildings and lease them up and we’re going to take the 100% lease buildings which we’ve done and put them out in the market, not in portfolio, but as one off and one off is important because that means that you’re down to like -- look at Town Point Center’s. That was only $12.5 million to $13 million. That’s a pretty bite-size piece of real estate really for anybody that’s in this business and so if I get a 60% loan on it, they’re really only getting about $7 million of financing and there’s multiple sources of that very small financing.

Quite a trouble out there Erwin is if you want to do $1 billon building or portfolio, that’s really where the debts dried up. You can get it done, don’t get me wrong; I mean people managed to pull that off, but when you start financing buildings that are $400 million and you want quarter of a billion dollar loan on it, that’s the market that disappeared, that’s where the CMBS market players played.

Insurance company’s never loan $250 million on buildings, the most they would go even in the best of times is around a $100 million unless you pulled a club deal off, like got two or three of them together, but that’s not easy. So, what we’re doing is really selling into the suite spot of the market which is small one off fully leased buildings and that’s our strategy right now; just to systematically carry those buildings out into the marketplace that are fully leased, that are small on a one off basis. So, I’m going to work a little harder, but it’s just what it’s going to take to be successful.

Operator

We’ll go next to Steven Shecnic, a Private Investor.

Steven Shecnic

Can you give me some color on the ramping and watch list and maybe your bad debt expense?

William Flatt

Steven this is Will Flatt. We are virtually consistent with where we were last quarter. I think we are watching the Financial Services industry very closely. Right when all this happened about this time last year we had a number of sort of smaller mortgage companies to go out on us and that’s already been taken into account. The number, our biggest risk was the NOC, which we announced and that unfortunately went the way that we did and sitting here today our receivable are consistent with historical and write-offs are consistent with historical. So, I don’t want to say we’re not watching some customers, but there is nothing that I can point to that is of threat today.

Mitchell Collins

And another thing too; the first quarter we did do some cleanup, I think the bad debt expenses gross before our shares was about $450,000; I believe this quarter it’s below $100 million in quarter. So, below a $125,000 has come down to more normal sort of run rate on bad debt expense.

Steven Rogers

It’s a good question and we are watching it very closely.

Operator

And at this time I’ll turn the conference back to management for any additional remarks.

Steven Rogers

Thanks for the detailed following of our company, we appreciate it very much and we’ll just sort of get back to it and get some of this work done that we’ve been talking about. I appreciate your time today.

Mitchell Collins

Thank you.

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Source: Parkway Properties, Inc. Q2 2008 Earnings Call Transcript
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