Parkway Properties, Inc. (PKY)
Q1 2010 Earnings Conference Call
May 4, 2010 11:00 AM ET
Sarah Clark – IR
Steve Rogers – CEO
Will Flatt – COO
Mandy Pope – Chief Investment Officer
Jim Ingram – Chief Investment Officer
Jordan Sadler – KeyBanc Capital Markets
Brendan Maiorana – Wells Fargo
Michael Bilerman – Citigroup
Ross Nussbaum – UBS
Mitch Germain – JMP Securities
Dan Donlan – Janney Montgomery Scott
Rich Anderson – BMO Capital Markets
John Guinee – Stifel Nicolaus
Previous Statements by PKY
» Parkway Properties Inc. Q3 2009 Earnings Conference Call
» Parkway Properties Q4 2008 Earnings Call Transcript
» Parkway Properties, Inc. 2009 Earnings Outlook Call Transcript
Good day everyone and welcome to the Parkway Properties First Quarter Earnings Conference call. Today’s call is being recorded. With us today are Chief Executive Officer, Mr. Steve Rogers, Chief Financial Officer, Mr. Richard Hickson; Chief Operating Officer, Mr. Will Flatt; Chief Investment Officer, Ms. Mandy Pope; Chief Investment Officer Mr. Jim Ingram and Ms. Sarah Clark, Investor Relations. At this time, I would like to turn the conference over to Ms. Sarah Clark. Please go ahead.
Thank you. Good morning everyone and welcome to Parkway’s 2010 first quarter conference call. Before we get started with this morning’s presentation, I would like to direct you to our website at www.pky.com where you can find a printable version of today’s presentation. On our website you will also find copies of our earnings press release from May 3 and a supplemental information package for the first quarter. Both of which include a reconciliation of non-GAAP measures that will be discussed today to the most directly comparable GAAP financial measures.
Certain statements contained in this presentation that are not in the present tense are that discuss the Company’s expectations are forward-looking statements within the meaning of the Federal Securities Laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that these expectations will be achieved.
Please see the forward-looking statements disclaimer in Parkway’s press release for factors that could cause material differences between forward-looking statements and actual results.
At this time I would like to turn the call over to Steve.
Thanks Sarah and good morning and thank you for joining us today. I’d like to start with an update on where we are in the cycle as that will drive most of the strategic and operational decisions made at Parkway. On page two of our web presentation, you will see the cycle chart we have shared with your before and we continue to agree with where it indicates we are in the real estate cycle.
As we focus on the fund with Texas Teachers, I would specifically like to note the blue bars in the chart which represents a year-over-year change in office property values. Based on these projections the majority of the value decline in the office sector is already occurred and should lead the opportunities over the next 12 to 24 months to invest in highly accretive office assets.
The same fact set that gives rise to lower rents and increased leasing calls during this point in a recession also provides the greatest opportunities in investment front coming out of it. History and experience have shown that occupancy growth will follow job growth which will allow the market to increase rents and result in a growing NOI.
On page three of the web presentation, you will see an analysis published by calculated risk which shows the percent of job losses of all recessions since World War II and the length of time it took for employment to fully recover. The red line in the chart indicates our current recession. Assuming we have a gradual recovery similar in 1990 and the 2001 recessions, it could take a while for employment to recover.
All things considered we believe we bottomed out in have aligned our strategic and operational decisions according to this belief. On the operational front, we are allocating capital to leases that create highest net present value for the company. We are also proactively addressing our lease roll over exposure for the next few years to mitigate risk and maintain occupancy, sometimes at a higher cost.
On the investment front, our acquisition pipeline has grown to its largest size in our two years and we’ve made numerous offers over the past few months. However the investment climate is still uncertain. One of my favorite brokers in Houston Danny Miller is fond of saying there is lot of activity in the trophy department and the train wreck department but not much in between.
Parkway is looking for those treasures in between. Cap rates for these properties have a very wide range, cap rate between 8 and 10%. Even on the low sides, spreads to fixed rate non-recourse mortgages are at a historical high. In March we announced our newest plan known as FOCUS in our 2009 annual report. We have also provided a summary of the main objectives of the plan on pages four and five of the web presentation. The FOCUS plan is centered on accomplishing specific actions which will contribute to our overall goal of delivering a 12% annual compounded total return to our shareholders over a three year period.
As typical with Parkway’s prior plans, the name is an acronym that details the actions we are currently taking and expect to take during the plan which will began in July 1, 2010 and extend three full years until June 30, 2013. Let me take a minute and walk you through some of the details of the plans. Most of which we have given you in the past 15 months is various calls.
The F in FOCUS stands for Fund and fund like discretionary investments. We view fund investments as the highest priority of our capital allocation because it gives our shareholders the highest risk adjusted return as measured by internal rate of return, cap rate and accretion per share. We are now ready to take advantage of investment opportunities through our $750 million fund with Texas Teachers. The O in FOCUS stands for full transition to an operator owner. With the goal of being a majority operator owner by the end of the plan.
This plan has started with investments in various joint venture structures and progressed with the implementation of our discretionary bonds. It is complemented by our efforts to maintain third-party management leasing contracts for the properties we sell as well as obtain new third-party business through the expansion of Parkway Realty Services. We were able to execute on this plan recently by maintaining the management contract at One Park Ten in Houston, which we sold in April. By the end of the plan we expect over 50% of our assets under management to be in fund life for third-party structures.
The C stands for capital allocation discipline. This is a twofold strategy that refers to the balance sheet strength as well as allocation of investment capital. Our overall capital structure goes to achieve a debt to gross asset value ratio of approximately 50% and a debt-to-EBITDA multiple of 6.5 times or less. Beyond the balance sheet, capital allocation refers to the goal of exiting non-strategic markets and sell properties that no longer meet our acquisition criteria and core markets through the continuation of our recycling program.