JACKSON, Miss., Jan. 18 /PRNewswire-FirstCall/ -- Parkway Properties, Inc. announced today the purchase of Gateway Center (the "Property") by Parkway Properties Office Fund, L.P. (the "Fund"), for a purchase price of $55.0 million. Gateway Center is a 228,000 square foot Class A office building located in the central business district of Orlando, Florida. Constructed in 1989, the Property consists of ten floors of office space above a six-story, 817-space structured parking facility, as well as an adjacent 98- space surface parking area. Gateway Center is located immediately off of I-4 and enjoys exceptional access, visibility, and 360 degree lake views. The Property is currently 79% leased to seventeen customers.
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The Fund expects to spend an additional $2.8 million on closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership. Simultaneous with the purchase, the Fund closed a $33.0 million first mortgage provided by Babson Capital Management LLC with a fixed interest rate of 5.92%, an initial thirty-six month interest only period, and a maturity date of January, 2016. Parkway's initial equity contribution of $5.5 million was provided by advances under the Company's existing lines of credit.
On a stand alone basis, Gateway Center is expected to yield the Fund a going-in capitalization rate ("cap rate") of 4.7% in the first twelve months of operations and a leveraged internal rate of return ("IRR") of approximately 12%. Parkway's annual return is comprised of 25% property income, which represents its pro-rata share, as well as market-based fees for asset and property management, leasing and construction supervision services. Adding these fees to the property economics increases the expected returns to Parkway to an initial cap rate of 6.8%, an unleveraged IRR of 11.8%, and a leveraged IRR of 18.1%. The supplemental information table that follows outlines this fee structure as it relates to this asset.
In addition, Parkway is eligible for a performance based incentive fee at the end of the Fund's life in the event the Fund exceeds an annual cumulative preferred return of 10%. Due to the uncertainty of achievement of this hurdle, this performance fee has not been included in the return to Parkway presented in this release. Parkway Realty Services will provide property management, construction supervision, and renewal leasing services for the Property. Services related to new leasing will be provided by an unaffiliated third- party leasing agent.
In addition to Gateway Center, the Fund has contracted to purchase, and currently has earnest money at risk, on two additional office properties at a combined purchase price of over $180 million. The Fund has commitments from Babson Capital Management LLC for first mortgage financing of approximately 60% of the purchase price on these two investments that are expected to close simultaneous with the respective purchases during the first quarter of 2008. Interest rates on the mortgages are locked at fixed interest rates below 5.8% with various terms that will be disclosed upon closing.
The Fund is a $500 million discretionary fund formed in July 2005 for the purpose of acquiring high-quality, multi-tenant office properties. Parkway is a 25% investor in the Fund, which upon completion will be capitalized with approximately $200 million of equity capital and $300 million of non-recourse, fixed-rate first mortgage debt. This represents a target debt to total capitalization of approximately 60% once the Fund is completely invested. The Fund targets acquisitions in Houston, Phoenix, Atlanta, Chicago, Charlotte, Orlando, Tampa / St. Petersburg, Ft. Lauderdale, Jacksonville, and Memphis. As of January 18, 2008, the Fund has invested $329.3 million of total capital and owns eleven assets with a total of 1.8 million square feet that are 91.5% leased.
Steven G. Rogers, President and Chief Executive Officer stated, "We are pleased with our investment in this high-quality asset in the Orlando CBD near our Citrus Center building. This investment, along with the two additional investments currently under contract, will complete the $500 million investment by the Fund. We are proud of the high-quality, well-diversified portfolio that we have assembled on behalf of our Fund partner, Ohio PERS, and our shareholders."
Parkway Properties, Inc., a member of the S&P Small Cap 600 Index, is a self-administered real estate investment trust specializing in the operation, leasing, acquisition, and ownership of office properties. The Company is geographically focused on the Southeastern and Southwestern United States and Chicago. Parkway owns or has an interest in 67 office properties located in 11 states with an aggregate of approximately 13.2 million square feet of leasable space as of January 18, 2008. Included in the portfolio are 19 properties totaling 2.9 million square feet that are owned jointly with other investors, representing 22% of the portfolio. Under the Company's GEAR UP Plan, which started January 1, 2006 and ends December 31, 2008, it is the Company's strategy to transform from an owner-operator to an operator-owner. The strategy highlights the Company's strength in providing excellent service in the operation of office properties in addition to its direct ownership of real estate assets. Fee-based real estate services are offered through the Company's wholly owned subsidiary, Parkway Realty Services, which also manages and/or leases approximately 1.8 million square feet for third party owners as of January 18, 2008.
Parkway Properties, Inc.'s press releases and additional information about the Company are available on the World Wide Web at http://www.pky.com/.
Certain statements in this release that are not in the present tense or discuss the Company's expectations (including the use of various forms of the words anticipate, forecast or project) are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current belief as to the outcome and timing of future events. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. These forward-looking statements involve risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the real estate industry and in performance of the financial markets; the demand for and market acceptance of the Company's properties for rental purposes; the amount and growth of the Company's expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in those areas where the Company owns properties; the risks associated with the ownership of real property; the risks associated with joint venture investments; and other risks and uncertainties detailed from time to time on the Company's SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company's results could differ materially from those expressed in the forward- looking statements. The Company does not undertake to update forward-looking statements.
Gateway Center Acquisition for Discretionary Fund Supplemental Information Property Information Gateway Center Location: Orlando, FL Size: 228,000 % leased as of January 18, 2008: 79% Year built: 1989 Purchase price: $55,000,000 Initial improvements during first two years $2,786,000 Return Information from Property Projected net operating income (initial 12 months) $2,658,000 Initial cap rate (initial 12 months) 4.7% Leveraged internal rate of return 12.0% Return Information to Parkway Projected net operating income (25% of total) (initial 12 months) $664,500 Fee income (initial 12 months) $325,000 Initial cap rate 6.8% Leveraged internal rate of return 18.1% Financial Information Purchase price paid to seller $55,000,000 Proceeds from first mortgage $33,000,000 Initial total equity investment $22,000,000 25% Equity investment from Parkway $5,500,000 Notes: 1. Asset management fees are calculated annually based on .95% of invested equity capital. 2. Property management fees are calculated based on 2.75% of gross revenue. 3. Leasing fees are included at market-based rates on projected renewal leases. 4. Construction supervision fees are calculated as 4.00% of projected capital expenditures. 5. In accordance with generally accepted accounting principles, these properties will be included in Parkway's consolidated financial statements. 6. Each quarter the Company will provide information about debt, results of operations and FFO related to the Fund properties in the Company's Supplemental Financial and Property Information Package. CONTACT: STEVEN G. ROGERS PRESIDENT & CHIEF EXECUTIVE OFFICER MANDY M. POPE CHIEF FINANCIAL OFFICER (601) 948-4091
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