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Parkway's exit from Jackson market seen as needed step

Parkway Properties’ planned exit from office markets in Jackson, Memphis and Richmond, Va., gets a thumbs-up from analysts who call the market departures an overdue course correction.

The consensus is the self-administered real estate investment trust is giving itself its best chance for success by leaving tertiary, or secondary, markets for core markets that can bring higher returns.

With Parkway’s departure, Jackson and the other two markets are to gain the Hertz Investment Group, a Santa Monica, Calif., real estate investment company that specializes in secondary markets. The company has agreed to pay $147.5 million for 1.9 million square feet of space in Jackson, Memphis and Richmond that is 76 percent occupied.

In Jackson, the properties set for a change in ownership include One Jackson Place, Pinnacle at Jackson Place and the 111 Capitol Building.

Hertz Investment Group either owns or operates nearly 10 million square feet of office space in the central business districts in Jackson, Indianapolis, Louisville, New Orleans, Shreveport, Lake Charles, St. Louis, Kansas City, Pittsburgh and the Ohio cities of Columbus and Cincinnati.

The buildings it will be getting have about $41.7 million in mortgage debt, of which $32 million is Parkway’s share. The sale is expected to close during the first quarter.

One analyst report said sale metrics indicate weak pricing — $78 a square foot and 9+ percent cap rate for 76 percent occupied portfolio, but noted this isn’t unexpected given weak pricing of late for non-core sub office properties.

Judah Hertz, who founded Hertz Investment in New York in 1979, is known for his ability to recognize a building’s hidden potential, the company Web site says.

The Hertz Group’s Jackson property is Regions Plaza, an office tower on Capitol Street that recently underwent a several-million-dollar renovation of its first two floors but has struggled since losing such major tenants as Butler Snow and HORNE CPAs in the last few years.

The sale will leave Parkway with one Jackson property of 267,000 square feet

Once these remaining assets in Jackson and Memphis are sold, Parkway’s core markets of Atlanta, Houston, Fort Lauderdale, Jacksonville, Orlando, Tampa, Philadelphia, and Phoenix will comprise about 90 percent of the total portfolio, said a Wells Fargo Securities equities research report issued last week.

“ We sense New Orleans, Charlotte, and Nashville could be the next in targets for non-core dispositions,” Wells Fargo said..

The Jackson company Leland Speed founded in New York and moved to Mississippi 30 years ago has little choice but to leave the Central Mississippi market, said analyst Richard C. Anderson in a report issued last week titled “Severing the Jackson Umbilical Cord.”

Shedding of the 1.9 million square feet of office product is another clear sign of the cord cutting that includes the headquarters move from Jackson to Orlando, new top executive leadership and the $103 million sale of the majority of its Fund 1 properties, Anderson of BMO Capital Markets said.

“We think the next step may be a change to the name of the company, as the new management team looks to bury the past.”

BMO Capital will maintain its “Under-perform” rating on Parkway, though the rating could change after new CEO Jim Heistand details Parkway’s strategy for 2012 and beyond in a 4th quarter earnings conference Feb. 7.

Heistand indicated Parkway’s new course in a press statement announcing the pending sale of the office buildings to California-based Hertz Group. A “portfolio sale of these assets allows us to quickly realign our overall portfolio and focus our resources and capital on building critical mass in our remaining core markets,” he said.

Anderson saw the course correction coming a couple of months ago with the announcement of a Dec. 31 departure for CEO Steve Rogers and the naming of Heistand to replace him. Heistand was founder and chairman of Orlando-based Eola Capital, which Parkway acquired for $462 million last fall in a deal the Jackson company said it was attracted to by Euloa‘s extensive properties management business.

“Work is under way to try to undo a lot of what has been done in the past,” wrote Anderson in a late 2011 report titled “A Strategic Lobotomy” that largely targets the tenure of Rogers.

Anderson said the leadership change could reverse strategies of the past five years that have produced “significant stock under-performance.”

Parkway’s recently completed sale of Fund I assets included nine properties totaling about 2 million square feet in five markets, representing a majority of the Fund I assets. The sale of the remaining four assets in the Fund I portfolio is expected to close during the first quarter. Parkway held ownerships in the properties ranging from 25 to 40 percent.

David AuBuchon, a Robert W. Baird & Co. analyst who covers Parkway, said he thinks selling the Fund 1 interests makes Parkway more apt to buy assets it can hold to its balance sheets going forward. And it furthers its aim of concentrating in core markets, AuBuchon said.

“What’s been happening recently is that I’ve seen a lot of companies move out of the tertiary markets,” he said. “A lot of capital is going to the core markets.”

What Parkway is doing, he said, reflects “how tough the office operating environment is right now.”

Any edge, AuBuchon noted, has to come from going into markets that are showing job growth. “This is what you see from many big real estate companies,” he added.

Robert W. Baird & Co is keeping a “Neutral” rating on Parkway. “We’ll stay on the sidelines until their leadership give us an idea of their strategies,” AuBuchon said.

Parkway, as a publicly trade real estate investment trust, has traded at $20 a share in the last three years and was at $17 in early May 2011 before falling to $12 in early November, according to a report by Wells Fargo Securities.

Wells Fargo said Parkway’s repositioning of its portfolio of office assets should increase long-term growth potential. “Yet, recycling assets and capital raising will likely suppress earnings,” Wells Fargo’s report said, and noted as well that elevated leasing costs will limited cash flow generation.


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