Parkway Properties Announces Agreement to Acquire Downtown Chicago Office Property

JACKSON, Miss., April 28 /PRNewswire-FirstCall/ -- Parkway Properties, Inc. (the "Company") today announced that it has entered into an agreement to acquire the fee simple interest in One Illinois Center, an office building located at 111 East Wacker Drive, and the attached four-level structured parking garage in Chicago, Illinois for $198 million. After including closing costs and transfer taxes of approximately $1.6 million, anticipated building improvements of $3.7 million and projected leasing costs of $12.0 million in the first two years of ownership, the total purchase price is expected to be approximately $215.3 million. The building contains 1,003,000 Rentable Square Feet ("RSF"), which includes office and retail space. The purchase price represents a cost of approximately $215 per rentable square foot, which is an estimated 23% discount to current estimated replacement cost of $280 per rentable square foot. Excluding the cost of the parking garage, the price per rentable square foot is $205. The agreement, which is subject to customary due diligence procedures and closing conditions, is expected to close in the second quarter.

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One Illinois Center is located within Illinois Center, one of America's premier mixed-use urban projects, which has an estimated daytime population of 40,000 employees plus 3,342 hotel rooms and over 4,000 residential units. The building is 86% leased to 38 office customers and 16 retail customers, with only 89,000 square feet of leases expiring prior to December 2010. Health Care Services Corporation (operating as Blue Cross Blue Shield of Illinois) is the largest customer in the building at 202,000 square feet (20% of the building) with a lease that expires in March 2017. Other large customers in the building include Federal Home Loan Bank of Chicago, the law firm of Shefsky & Froelich, and GolinHarris Communications, Inc., a public relations firm, which combine to account for an additional 266,000 square feet (27% of the building) under leases expiring in July 2011 and beyond.

The 32-story building includes 969,500 RSF of Class A office space and 33,500 RSF of retail space and was constructed in 1970. The building underwent an $18 million renovation between 1997 and 2001. Improvements included complete renovation of the lobby, a new fire-safety system, new entry finishes, renovation of all elevator cabs and mechanical systems, upgrades to over 75% of the restrooms, replacement of the roof, significant upgrades to building mechanical and electrical systems and substantial upgrades to the parking garage. Designed by the internationally recognized architectural firm of Ludwig Mies van der Rohe, the building is a mirror image of the 233 North Michigan building, which Parkway also owns. The two buildings share a four- level, below-grade parking garage with a maximum capacity of 870 vehicles that is accessible from East Wacker Drive, South Water Street and Stetson Street. The retail space is located on the lower level concourse with access to surrounding properties and public transportation. The Company expects that the combined ownership, consistent with the developer's original intentions, will produce benefits in leasing, cost-savings and enhance the overall value of the development.

Upon closing of the acquisition, the building will be managed by Parkway Realty Services. The Company will contract with third parties for new office leasing and both new and renewal retail leasing. Additionally, Jay Buckley will move to Chicago to supervise all management and leasing efforts of the Chicago portfolio and serve as Senior Vice President and Asset Manager. Jay currently serves as Vice President and Asset Manager for Tennessee, which represents 1,993,000 square feet of the Company's portfolio. During his six-year tenure with Parkway, Jay has been a successful participant in Parkway's "boot camp" and "parachute" programs and has held numerous positions at Parkway, including Investor Relations Officer.

Including estimated amortization of above/below market leases recorded under FAS 141 and straight line rent, the investment is expected to add approximately $.06 to FFO per diluted share in 2006, $.05 in 2007 and $.15 in 2008. Additionally, it is expected to add approximately $400,000 to FAD in 2006, $400,000 in 2007, and $1.6 million in 2008. Excluding straight line rent and above/below market lease amortization, the purchase would add $.03, $.02 and $.15 to FFO per diluted share in 2006, 2007 and 2008, respectively.

This purchase will be funded by a $148.5 million non-recourse fixed rate first mortgage at an estimated 117 basis point spread over the 10-year US Treasury rate, currently calculated to be 6.27%, and amortized over 30 years with a 10-year maturity. Additional purchase funding will come from $49.5 million drawn under existing lines of credit. The Company intends to repay amounts drawn under lines of credit with proceeds from the pending sales of two assets, which are expected to produce net cash proceeds to the Company of approximately $35.6 million in June 2006. Furthermore, the Company expects to form a joint venture later in 2006 including this asset, with Parkway retaining an ownership interest of approximately 25%. Proceeds from the formation of the joint venture will be used to further reduce amounts drawn under bank lines of credit.

The projected initial unleveraged yield (going-in cap rate) is approximately 6.3%, calculated using first year estimated net operating income of $13.5 million and the total purchase price of $215.3 million; an unleveraged internal rate of return of 8.7%; and a leveraged internal rate of return of 12.7%. In the proposed joint venture structure assuming a 25% retained ownership, the going-in cap rate to Parkway would be 7.2%, the unleveraged internal rate of return would be 9.7% and the leveraged internal rate of return would be 16.4%. Tables 5 and 6 list the assumptions used to calculate these economic returns.

Following the purchase of 111 East Wacker Drive, Parkway will own or have an interest in approximately 13,232,000 square feet of office space. Chicago will become the Company's second largest market on a square foot basis with 2,073,000 square feet, representing 16% of the portfolio based on square footage and 24% of the portfolio based on annualized rental revenue. Houston will remain the Company's largest market on a square foot basis with 2,246,000 square feet, representing 17% of the portfolio based on square footage, and 16% of the portfolio based on annualized rental revenue.

Steven G. Rogers, President and CEO, stated, "We are pleased to be expanding our presence in the Chicago market with the purchase of One Illinois Center located at 111 East Wacker Drive. This landmark asset advances Parkway's strategy of investing in central business districts in select institutional markets. We are enthusiastic about the revitalization and re-urbanization of downtown Chicago, and in particular the New East Side, in which the building is located. This submarket has numerous projects planned and underway including the 28-acre Lakeshore East development, Millennium Park and the 65-story Mandarin Oriental Hotel. Chicago continues to be one of the Nation's top most livable 24-hour cities and represents an opportunity relative to valuations and other major metro areas, particularly on the East and West coasts.

The quality, credit-worthiness and diversification of the customer base complement our existing portfolio. We believe that Parkway's discipline and Focus on Operations will allow us to execute the same leasing and customer retention strategies that we employed successfully at 233 North Michigan Avenue since our initial purchase in 2001. At 233, we leased a total of 267,000 square feet of new leases and 160,000 square feet of renewal and expansions leases in five years and are currently 95% leased. The positive financial impact of this acquisition will assist us in achieving our GEAR UP Plan by making a material positive impact on FFO and FAD. Consistent with our stated goal of evolving from an owner-operator to an operator-owner, we intend to combine 111 East Wacker with 233 North Michigan and form a joint venture to own both assets with an institutional partner. The economic benefit of this will improve our cap rate, internal rates of return and return on equity to our common 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, acquisition, ownership, management, and leasing of office properties. The Company is geographically focused on the Southeastern and Southwestern United States and Chicago. Parkway owns or has an interest in 66 office properties located in 11 states with an aggregate of approximately 12,229,000 square feet of leasable space as of April 28, 2006. The Company also offers fee-based real estate services through its wholly owned subsidiary, Parkway Realty Services, to its owned properties and to its third party and minority interest properties.

Parkway Properties, Inc.'s press releases and additional information about the Company are available at http://www.pky.com/.

Certain portions of this press release may contain forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include those that are not in the present or past tense that discuss the Company's beliefs, expectations or intentions or those pertaining to the Company's capital resources or estimates of market rental rates. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others discussed in the Company's filings under the Securities Exchange Act of 1934, could cause actual results and future events to differ materially from those set forth or contemplated in the forward- looking statements: failure of the acquisition to be consummated, defaults under or non-renewal of leases, increases in market interest rates, increases in operating costs, failure to obtain necessary outside financing, environmental uncertainties, financial market fluctuations, changes in real estate and zoning laws, increases in real property tax rates, a deterioration in general economic conditions in the United States or the Chicago metropolitan area and adverse developments or other changes in the Chicago real estate market.

NOTICE OF CONFERENCE CALL

Parkway will conduct its regularly scheduled quarterly earnings conference call on Tuesday, May 2, 2006, at 12:00 p.m. ET, at which time it will discuss this purchase. The number for the conference call is (800) 289-0518. A taped replay of the call can be accessed 24 hours a day through May 12, 2006 by dialing (888) 203-1112, and using the pass code of 7863415. Additionally, an audio replay will be archived and indexed on Parkway's website. Please participate in the visual portion of the conference call by accessing the Company's website at http://www.pky.com/ and clicking on the "1QCall" icon. By clicking on topics in the left margin, you can follow visual representations of the presentation.

NOTICE OF 111 EAST WACKER BUILDING TOUR

Parkway will conduct a building tour and information exchange for analysts and investors. The exact date will be set forth in a press release issued upon closing of the purchase. Please contact Will Flatt at (800) 748-1667 for more information.

Supplemental Tables Table 1: Parkway's GEAR UP Operating Strategy G Great People. Jay Buckley, who has been with Parkway for six years, will move to Chicago to manage our team immediately upon purchase of One Illinois Center. Jay will continue to represent Parkway through the New East Side Association ("NESA"), which is designed to promote cooperation among the office, hotel, residential and other stakeholders in the New East Side. Will Flatt served as a past president of the NESA before moving to Jackson to assume the responsibilities of Chief Financial Officer. E Equity Opportunities. We intend to raise substantial private equity which has continued to show interest in our asset base. This institutional capital tends to have a lower cost of capital today than other forms of equity. A Asset Recycling. We will purchase One Illinois Center on our balance sheet with the intent to combine with 233 North Michigan and joint venture with an institutional partner. These two assets represent a significant investment opportunity for an institutional partner. R Retain our customers. Parkway's reputation of providing great customer service at 233 North Michigan Avenue should help to increase occupancy and retain customers at One Illinois Center. Since purchasing 233 North Michigan Avenue in 2001, our customer retention and occupancy at the building have outperformed the market. U Uncompromising Focus on Operations. By bringing our passion for an uncompromising focus on operations to this building, we expect to achieve operating efficiencies. It is our stated goal to evolve from an owner-operator to an operator-owner. We believe One Illinois Center, combined with 233 North Michigan Avenue, will help achieve that goal. P Performance. This purchase will contribute to FFO and FAD and help us achieve our stated performance goal in GEAR UP of $7.18 Adjusted Funds Available for Distribution per share over the three years of the Plan. Table 2: Benefits to Shareholders * This purchase is accretive to FFO and FAD in 2006, 2007 and 2008. * The property has a stable, long-term income stream from strong credit tenants. * One Illinois Center is a high quality, physically attractive, well located asset, designed and built by an internationally recognized architectural/engineering team. * The Chicago CBD is recovering and we believe undervalued relative to major metro areas on the East and West coasts. * This property purchase will expand our presence in institutionally accepted markets. * The purchase price represents a significant discount to replacement cost. * This property will be attractive to joint venture partners, especially when combined with 233 North Michigan Avenue. Table 3: Major Customers Tenants Square Footage Lease Expiration Health Care Services Corporation (Blue Cross Blue Shield of Illinois) 202,000 3/31/17 Federal Home Loan Bank of Chicago 132,000 7/31/11 Shefsky & Froelich 68,000 5/31/15 GolinHarris Communications, Inc. 66,000 7/13/12 Service Employees International Union 34,000 12/31/16 Digitas, Inc. 33,000 7/31/13 National Council of Nursing 29,000 1/13/13 Bagby & Company 23,000 6/30/15 Total 587,000 Percentage of Building 58.5% Table 4: Allocation of Portfolio (Post Closing) Percent of Total Percent of Total Market Square Footage Rental Revenue Houston, TX 17 % 16 % Chicago, IL 16 % 24 % Atlanta, GA 10 % 11 % Memphis, TN 8 % 7 % Phoenix, AZ 7 % 8 % Columbia, SC 6 % 5 % Jackson, MS 6 % 5 % Orlando, FL 5 % 5 % Knoxville, TN 4 % 3 % Charlotte, NC 4 % 3 % Richmond, VA 4 % 3 % Other 13 % 10 % 100 % 100 % * Houston, Chicago, Atlanta and Phoenix will comprise 59% of annualized rental revenue post closing. Table 5: ARGUS Underwriting Assumptions for IRR Calculations * $13.50 Net Rent Office $40 Gross Rent on East Mall Retail $70 Gross Rent on Main Mall Retail * Six Months Estimated Downtime Upon Lease Expiration * 3% General Vacancy Loss * 75% Customer Retention Ratio * 11 year Estimated Holding Period with 8% Residual Cap Rate on Sale * 3% Assumed Inflation on Other Income and Expense * Debt at $148.5 Million, 30-Year Fixed Rate at 6.27%, interest only for five years Table 6: Assumptions for IRR Calculations held in Joint Venture * Parkway to retain a 25% ownership interest. * Parkway to receive a promoted return above a 10% leveraged internal rate of return to the limited partner. * Parkway to receive market-based management fees of 3%, leasing fees and construction management fees. CONTACT: STEVEN G. ROGERS PRESIDENT & CHIEF EXECUTIVE OFFICER WILLIAM R. FLATT CHIEF FINANCIAL OFFICER (601) 948-4091