Highwoods Realty Limited Partnership 10-Q 2003 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission file number: 000-21731

HIGHWOODS REALTY LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

North Carolina	56-1864557
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

3100 Smoketree Court, Suite 600, Raleigh, N.C.

(Address of principal executive office)

27604

(Zip Code)

(919) 872-4924

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Securities Exchange Act).     Yes  ¨     No  x

HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002	3
	Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002 (unaudited)	4
	Consolidated Statement of Partners’ Capital for the nine months ended September 30, 2003 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Disclosure Regarding Forward-Looking Statements	20
	Overview	20
	Property Information	21
	Customer Diversification	22
	Critical Accounting Policies	22
	Results of Operations	22
	Liquidity and Capital Resources	29
	Impact of Recently Issued Accounting Standards	37
	Funds From Operations and Cash Available for Distribution	38
	Inflation	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42
PART II OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	44

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

We refer to (1) Highwoods Properties, Inc. as the “Company,” (2) Highwoods Realty Limited Partnership as the “Operating Partnership,” (3) the Company’s common stock as “Common Stock” and (4) the Operating Partnership’s common partnership interests as “Common Units.”

The information furnished in the accompanying balance sheets, statements of income, statement of partners’ capital and statements of cash flows reflect all adjustments (consisting of normal recurring accruals) that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements for the interim period.

The aforementioned financial statements should be read in conjunction with the notes to consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and in our 2002 Annual Report on Form 10-K.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

Consolidated Balance Sheets

($ in thousands)

	September 30, 2003			December 31, 2002
	(Unaudited)
Assets:
Real estate assets, at cost:
Land and improvements	$	399,330		$	388,904
Buildings and tenant improvements		2,903,262			2,822,846
Development in process		11,159			6,419
Land held for development		175,891			162,918
Furniture, fixtures and equipment		21,599			20,960
		3,511,241			3,402,047
Less—accumulated depreciation		(517,649	)		(457,734	)
Net real estate assets		2,993,592			2,944,313
Property held for sale		145,548			164,549
Cash and cash equivalents		12,683			10,730
Restricted cash		6,810			8,582
Accounts receivable, net		12,503			13,389
Notes receivable		10,021			9,949
Accrued straight-line rents receivable		51,592			48,777
Investment in unconsolidated affiliates		70,069			75,019
Other assets:
Deferred leasing costs		105,642			99,803
Deferred financing costs		44,506			26,120
Prepaid expenses and other		16,326			15,295
		166,474			141,218
Less—accumulated amortization		(81,456	)		(71,472	)
Other assets, net		85,018			69,746
Total Assets	$	3,387,836		$	3,345,054
Liabilities, Redeemable Units and Partners’ Capital:
Mortgages and notes payable	$	1,603,483		$	1,489,220
Accounts payable, accrued expenses and other liabilities		112,837			114,870
Total Liabilities		1,716,320			1,604,090
Redeemable operating partnership units:
Common Units, 6,505,148 and 6,974,524 outstanding at September 30, 2003 and December 31, 2002, respectively		155,213			154,137
Series A Preferred Units, 104,945 outstanding at September 30, 2003 and December 31, 2002		103,308			103,308
Series B Preferred Units, 6,900,000 outstanding at September 30, 2003 and December 31, 2002		166,346			166,346
Series D Preferred Units, 400,000 outstanding at September 30, 2003 and December 31, 2002		96,842			96,842
Partners’ Capital:
Common Units:
General partner Common Units, 591,935 and 599,659 outstanding at September 30, 2003 and December 31, 2002, respectively		11,585			12,332
Limited partner Common Units, 52,096,421 and 52,391,727 outstanding at September 30, 2003 and December 31, 2002, respectively		1,146,992			1,220,902
Accumulated other comprehensive loss		(4,002	)		(9,204	)
Deferred compensation		(4,768	)		(3,699	)
Total Partners’ Capital		1,149,807			1,220,331
Total Liabilities, Redeemable Units and Partners’ Capital	$	3,387,836		$	3,345,054

See accompanying notes to consolidated financial statements

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HIGHWOODS REALTY LIMITED PARTNERSHIP

Consolidated Statements of Income

(Unaudited and $ in thousands, except per unit amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Rental revenue	$	106,923		$	109,505		$	315,531		$	327,904
Operating expenses:
Rental property		37,107			34,686			109,141			102,908
Depreciation and amortization		31,536			29,871			95,752			86,992
Interest expense:
Contractual		28,047			27,319			83,307			79,263
Amortization of deferred financing costs		819			347			2,202			1,027
		28,866			27,666			85,509			80,290
General and administrative (includes $3,700 of nonrecurring compensation and management fee expense in the nine months ended September 30, 2002)		6,046			4,132			17,670			18,058
Litigation reserve		—			2,700			—			2,700
Total operating expenses		103,555			99,055			308,072			290,948
Other income:
Interest and other income		2,326			2,647			8,345			8,371
Equity in earnings of unconsolidated affiliates		1,562			1,198			2,750			6,072
		3,888			3,845			11,095			14,443
Income before gain/(loss) on disposition of land and depreciable assets and discontinued operations		7,256			14,295			18,554			51,399
Gain on disposition of land		1,067			741			3,342			6,498
(Loss)/gain on disposition of depreciable assets		(203	)		(329	)		37			5,050
Income from continuing operations		8,120			14,707			21,933			62,947
Discontinued operations:
Income from discontinued operations		3,404			5,838			13,111			18,508
Gain/(loss) on sale of discontinued operations		12,113			(3,216	)		13,303			(1,080	)
		15,517			2,622			26,414			17,428
Net income		23,637			17,329			48,347			80,375
Distributions on preferred units		(7,713	)		(7,713	)		(23,139	)		(23,139	)
Net income available for common unitholders	$	15,924		$	9,616		$	25,208		$	57,236
Net income per common unit—basic:
Income/(loss) from continuing operations	$	0.01		$	0.12		$	(0.02	)	$	0.66
Income from discontinued operations		0.26			0.04			0.45			0.29
Net income	$	0.27		$	0.16		$	0.43		$	0.95
Net income per common unit—diluted:
Income/(loss) from continuing operations	$	0.01		$	0.12		$	(0.02	)	$	0.66
Income from discontinued operations		0.26			0.04			0.45			0.29
Net income	$	0.27		$	0.16		$	0.43		$	0.95
Weighted average common units outstanding—basic:
Common Units:
General Partners		593			603			596			603
Limited Partners		58,647			59,641			58,974			59,718
Total		59,240			60,244			59,570			60,321
Weighted average common units outstanding—diluted:
Common Units:
General Partners		595			605			597			607
Limited Partners		58,827			59,856			59,057			60,087
Total		59,422			60,461			59,654			60,694

See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

Consolidated Statement of Partners’ Capital

For the Nine Months Ended September 30, 2003

(Unaudited and $ in thousands)

	Common Unit						Accumulated Other Comprehensive Loss			Deferred Compensation			Total Partners’ Capital
	General Partner’s Capital			Limited Partners’ Capital
Balance at December 31, 2002	$	12,332		$	1,220,902		$	(9,204	)	$	(3,699	)	$	1,220,331
Issuance of Common Units		6			613			—			—			619
Redemption of Common Units		(98	)		(9,697	)		—			—			(9,795	)
Distributions paid on Common Units		(765	)		(75,760	)		—			—			(76,525	)
Preferred distributions paid on Common Units		(231	)		(22,908	)		—			—			(23,139	)
Net income		483			47,864			—			—			48,347
Adjustments of redeemable Common Units to fair value		(73	)		(7,203	)		—			—			(7,276	)
Other comprehensive income		—			—			5,202			—			5,202
Issuance of restricted units		21			2,059			—			(2,080	)		—
Repurchase of Common Units		(93	)		(9,184	)		—			—			(9,277	)
Fair value of options issued		3			306			—			(309	)		—
Amortization of deferred compensation		—			—			—			1,320			1,320
Balance at September 30, 2003	$	11,585		$	1,146,992		$	(4,002	)	$	(4,768	)	$	1,149,807

See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

Consolidated Statements of Cash Flows

(Unaudited and $ in thousands)

	Nine Months Ended September 30,
	2003			2002
Operating activities:
Income from continuing operations	$	21,933		$	62,947
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		95,752			86,992
Amortization of deferred compensation		1,320			944
Amortization of deferred financing costs		2,202			1,027
Amortization of accumulated other comprehensive loss		1,360			1,157
Equity in earnings of unconsolidated affiliates		(2,750	)		(6,072	)
Gain on disposition of land and depreciable assets		(3,379	)		(11,548	)
Reserve for accrued straight line rent receivable		—			3,110
Discontinued operations		15,327			27,254
Changes in operating assets and liabilities		(1,733	)		8,279
Net cash provided by operating activities		130,032			174,090
Investing activities:
Additions to real estate assets		(162,164	)		(98,808	)
Proceeds from disposition of real estate assets		122,399			164,403
Distributions from unconsolidated affiliates		7,514			7,126
Investments in notes receivable		2,643			2,595
Other investing activities		(1,675	)		450
Net cash (used in)/provided by investing activities		(31,283	)		75,766
Financing activities:
Distributions paid on common units		(76,525	)		(105,825	)
Dividends paid on preferred units		(23,139	)		(23,139	)
Net proceeds from the sale of common units		619			5,326
Redemption/repurchase of common units		(19,072	)		(3,376	)
Borrowings on revolving loans		187,500			243,000
Repayments of revolving loans		(147,500	)		(312,000	)
Borrowings on mortgages and notes payable		2,190			34,942
Repayments of mortgages and notes payable		(10,413	)		(75,305	)
Net change in deferred financing costs		(10,456	)		(459	)
Net cash used in financing activities		(96,796	)		(236,836	)
Net increase in cash and cash equivalents		1,953			13,020
Cash and cash equivalents at beginning of the period		10,730			794
Cash and cash equivalents at end of the period	$	12,683		$	13,814
Supplemental disclosure of cash flow information:
Cash paid for interest	$	76,367		$	79,751

See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

Consolidated Statements of Cash Flows (Continued)

(Unaudited and $ in thousands)

Supplemental disclosure of non-cash investing and financing activities:

The following table summarizes the assets contributed by the holders of Common Units in the Operating Partnership, the assets acquired subject to mortgage notes payable and other non-cash transactions:

	Nine Months Ended September 30,
	2003			2002
Assets:
Net real estate assets	$	71,978		$	37,098
Cash and cash equivalents		—			729
Accounts receivable		—			154
Notes receivable		2,715			—
Investments in unconsolidated affiliates		(1,861	)		—
Deferred financing costs		17,810			—
Prepaid expenses and other		3,842			—
	$	94,484		$	37,981
Liabilities:
Mortgages and notes payable		82,486			24,495
Accounts payable, accrued expenses and other liabilities		4,954			14,163
	$	87,440		$	38,658
Equity:	$	7,044		$	(677	)

See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(Unaudited)

1. BASISOF PRESENTATION

The consolidated financial statements include the accounts of Highwoods Realty Limited Partnership (the “Operating Partnership”) and its majority-controlled affiliates. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Operating Partnership is managed by its general partner, Highwoods Properties, Inc. (the “Company”).

The Operating Partnership’s 104,945 Series A Preferred Units are senior to the Common Units and rank pari passu with the Series B and D Preferred Units. The Series A Preferred Units have a liquidation preference of $1,000 per unit. Distributions are payable on the Series A Preferred Units at the rate of $86.25 per annum per unit.

The Operating Partnership’s 6,900,000 Series B Preferred Units are senior to the Common Units and rank pari passu with the Series A and D Preferred Units. The Series B Preferred Units have a liquidation preference of $25 per unit. Distributions are payable on the Series B Preferred Units at the rate of $2.00 per annum per unit.

The Operating Partnership’s 400,000 Series D Preferred Units are senior to the Common Units and rank pari passu with the Series A and B Preferred Units. The Series D Preferred Units have a liquidation preference of $250 per unit. Distributions are payable on Series D Preferred Units at a rate of $20.00 per annum per unit.

The Common Units are owned by the Company and by certain limited partners of the Operating Partnership. The Common Units owned by the Company are classified as general partners’ capital and limited partners’ capital.

The Operating Partnership is generally obligated to redeem each of the Common Units not owned by the Company (the “Redeemable Operating Partnership Units”) at the request of the holder thereof for cash, provided that the Company at its option may elect to acquire such unit for one share of Common Stock or the cash value thereof. The Company’s Common Units held by the Company are not redeemable for cash. The Redeemable Operating Partnership Units are classified outside of the permanent partners’ capital in the accompanying balance sheet at their fair market value (equal to the fair market value of a share of Common Stock) at the balance sheet date.

Certain amounts in the September 30, 2002 and December 31, 2002 financial statements included in this Quarterly Report have been reclassified to conform to the September 30, 2003 presentation. These reclassifications had no material effect on net income or partners’ capital as previously reported in the Operating Partnership’s audited Consolidated Financial Statements or Note 18 to the audited Consolidated Financial Statements included in the Operating Partnership’s 2002 Annual Report on Form 10-K.

The accompanying financial information has not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows have been made. We have condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. These financial statements should be read in conjunction with our 2002 Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

2. INVESTMENTSIN UNCONSOLIDATED AFFILIATES

During the past several years, the Operating Partnership has formed various joint ventures with unrelated investors. The Operating Partnership has retained minority equity interests ranging from 20.00% to 50.00% in these joint ventures. As required by GAAP, the Operating Partnership has accounted for its joint venture activity using the equity method of accounting, as the Operating Partnership does not control these joint ventures. As a result, the assets and liabilities of the Operating Partnership’s joint ventures are not included on its balance sheet.

The following table sets forth information regarding the Operating Partnership’s joint venture activity as recorded on the respective joint venture’s books for the nine months ended September 30, 2003 and 2002 ($ in thousands):

			September 30, 2003											September 30, 2002
	Percent Owned		Revenue		Operating Expenses		Interest		Depr/ Amort		Net Income/ (Loss)			Revenue		Operating Expenses		Interest		Depr/ Amort		Net Income/ (Loss)
Income Statement Data:
Board of Trade Investment Company	49.00	%	$	1,768	$	1,191	$	50	$	304	$	223		$	2,012	$	1,216	$	64	$	251	$	481
Dallas County Partners (1)	50.00	%		7,954		4,135		2,079		1,415		325			8,389		4,102		1,976		1,470		841
Dallas County Partners II (1)	50.00	%		4,579		1,914		1,775		617		273			4,453		1,897		1,856		796		(96	)
Fountain Three (1)	50.00	%		5,174		2,346		1,687		1,160		(19	)		4,999		2,043		1,525		983		448
RRHWoods, LLC (1)	50.00	%		10,918		5,551		1,979		2,545		843			10,285		5,257		2,755		2,684		(411	)
Highwoods DLF 98/29, LP	22.81	%		14,492		4,142		3,448		2,592		4,310			15,456		4,123		3,496		2,538		5,299
Highwoods DLF 97/26 DLF 99/32, LP	42.93	%		12,082		3,345		3,448		2,979		2,310			12,658		3,272		3,479		2,972		2,935
Highwoods-Markel Associates, LLC	50.00	%		2,462		1,300		800		464		(102	)		2,382		1,243		725		419		(5	)
MG-HIW, LLC	20.00	% (2)		32,862		12,254		6,202		6,295		8,111	(3)		38,347		13,375		8,098		6,160		10,714
MG-HIW Peachtree Corners III, LLC	50.00	% (4)		219		75		73		76		(5	)		—		29		—		28		(57	)
MG-HIW Rocky Point, LLC	50.00	% (5)		—		—		—		—		—			1,800		555		271		248		726
MG-HIW Metrowest I, LLC	50.00	% (4)		—		26		—		—		(26	)		—		19		—		—		(19	)
MG-HIW Metrowest II, LLC	50.00	% (4)		441		325		124		252		(260	)		204		176		20		181		(173	)
Concourse Center Associates, LLC	50.00	%		1,556		401		518		227		410			1,586		401		508		227		450
Plaza Colonnade, LLC	50.00	%		10		2		—		3		5			5		—		—		1		4
SF-HIW Harborview, LP	20.00	% (5)		4,208		1,288		1,052		650		1,218			271		74		79		72		46
Total			$	98,725	$	38,295	$	23,235	$	19,579	$	17,616		$	102,847	$	37,782	$	24,852	$	19,030	$	21,183

(1) Des Moines joint ventures.

(2) The Operating Partnership acquired the assets and/or its partner’s 80.0% equity interest in this joint venture in July 2003. (See Note 3 for further discussion).

(3) Net income excludes a $12.1 million impairment charge at the joint venture level of which the Operating Partnership’s share is $2.4 million. (See Note 3 for further discussion). With the impairment charge, the joint venture had a net loss of $4.0 million.

(4) On July 29, 2003, the Operating Partnership entered into an option agreement with its partner, Miller Global, to acquire their 50.0% interest in the remaining assets encompassing 87,832 square feet of property of MG-HIW Metrowest I, LLC and MG-HIW Metrowest II, LLC for $3.2 million and was assigned Miller Global’s 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC.

(5) On June 26, 2002, the Operating Partnership acquired its joint venture partner’s interest in MG-HIW Rocky Point, LLC, which owned Harborview Plaza, a 205,000 rentable square foot office property. On September 11, 2002, the Operating Partnership contributed Harborview Plaza to SF-HIW Harborview, LP, a newly formed joint venture with a different partner, in exchange for a 20.0% limited partnership interest and $12.1 million in cash.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

3. ACQUISITIONOF JOINT VENTURE ASSETSAND EQUITY INTERESTS

On July 29, 2003, the Operating Partnership acquired the assets and/or its partner’s 80.0% equity interest related to 15 properties encompassing 1.3 million square feet owned by MG-HIW, LLC. The properties are located in Atlanta, the Research Triangle and Tampa. At the closing of the transaction, the Operating Partnership paid Miller Global $28.1 million, repaid $41.4 million of debt related to the properties and assumed $64.7 million of debt. The transaction implies a valuation (100.0% ownership) for the assets of $138.3 million and other net assets of approximately $2.9 million. The Operating Partnership is accounting for the acquisition in accordance with the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). The Operating Partnership allocated the purchase price to net tangible and identified intangible assets acquired based on their fair values. The Operating Partnership assessed fair value based on available market information and estimated cash flow projections that utilize discount and capitalization rates deemed appropriate by management. Under the guidance of SFAS 141, this allocation may be adjusted for up to one year from the date of purchase. The purchase price as allocated at July 29, 2003 may be subject to change. The results of operations for this acquisition are included in the Operating Partnership’s Consolidated Statements of Income from July 29, 2003 through September 30, 2003.

Additionally, the Operating Partnership entered into an option agreement to acquire Miller Global’s 80.0% interest in the remaining assets of MG-HIW, LLC for between $62.5 and $65.2 million depending on the closing date and the distributions from MG-HIW, LLC prior to closing. The remaining assets of MG-HIW, LLC are five properties encompassing 1.3 million square feet located in the central business district of Orlando. The properties were 83.8% leased as of September 30, 2003 and are encumbered by $136.2 million of debt, which will be assumed by the Operating Partnership at closing. On July 29, 2003, the Operating Partnership entered into a letter of credit in the amount of $7.5 million in favor of Miller Global which can be drawn by Miller Global in the event the Operating Partnership does not exercise the option by March 24, 2004. (See Note 10 for further discussion).

The following unaudited pro forma information has been prepared assuming the acquisition of the MG-HIW, LLC properties described above occurred January 1, 2002 ($ in thousands, except per unit amounts):

	Pro Forma for the Nine Months Ended September 30,
	2003		2002
Total revenue	$	377,718	$	413,449
Net income	$	54,758	$	85,643
Net income per unit - basic	$	0.53	$	1.04
Net income per unit - diluted	$	0.53	$	1.03

The pro forma information is not necessarily indicative of what the Operating Partnership’s results of operations would have been if the transaction had occurred at the beginning of the period presented. Additionally, the pro forma information does not purport to be indicative of the Operating Partnership’s results of operations for future periods.

An impairment charge of $12.1 million was recorded by MG-HIW, LLC joint venture for assets classified as held for sale as of June 30, 2003, which were subsequently sold by MG-HIW, LLC to the Operating Partnership on July 29, 2003. The Operating Partnership’s share of this charge of $2.4 million reduced the Operating Partnership’s equity in earnings of unconsolidated affiliates for the nine months ended September 30, 2003.

4. RELATED PARTY TRANSACTIONS

On July 16, 1999, the Operating Partnership acquired from an entity (“Bluegrass”) controlled by an executive officer and director of the Company an option to purchase development land (102.5 acres total) in a staged takedown in the Bluegrass Valley office development project for approximately $4.6 million in Common Units. On October 31, 2002, the Operating Partnership exercised its option and purchased 30.6 acres of the optioned property as part of the staged takedown for $4.6 million. At that time, the Operating Partnership also acquired from Bluegrass 10.5 acres of developable land not included in the optioned land for $2.6 million.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

4. RELATED PARTY TRANSACTIONS - Continued

On January 17, 2003, the Operating Partnership acquired an additional 23.5 acres of the contracted land from Bluegrass for $2.3 million. In May 2003, 4.0 acres of the remaining 24.9 acres not yet taken down was taken by the Georgia Department of Transportation to develop a roadway interchange for consideration of $1.8 million. The Department of Transportation took possession and title of the property in June 2003. As part of the terms of the option contract between the Operating Partnership and Bluegrass, the Operating Partnership was entitled to the proceeds from the condemnation of $1.8 million, less the contracted purchase price between the Operating Partnership and Bluegrass for the condemned property of $737,348. On September 30, 2003, as a result of the condemnation, the Operating Partnership received the proceeds of $1.8 million. A related party payable of $737,348 to Bluegrass related to the condemnation of the development land is included in accounts payable, accrued expenses and other liabilities in the Operating Partnership’s Consolidated Balance Sheet at September 30, 2003 and a gain of $1.0 million related to the condemnation of the development land is included in gain on disposition of land in the Operating Partnership’s Consolidated Statement of Income for the nine months ended September 30, 2003.

During 2000, in connection with the formation of the MG-HIW Peachtree Corners III, LLC, a construction loan was made by an affiliate of the Operating Partnership to this joint venture. Interest accrued at a rate of LIBOR plus 200 basis points. This construction loan was repaid in full on July 29, 2003 when the Operating Partnership was assigned its partner’s 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC.

5. DERIVATIVE FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, requires the Operating Partnership to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in Accumulated Other Comprehensive Loss (“AOCL”) until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings.

The Operating Partnership’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, the Operating Partnership enters into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate its interest rate risk with respect to various debt instruments. The Operating Partnership does not hold these derivatives for trading or speculative purposes.

On the date that the Operating Partnership enters into a derivative contract, the Operating Partnership designates the derivative as (1) a hedge of the variability of cash flows that are to be received or paid in connection with a recognized liability (a “cash flow” hedge), (2) a hedge of changes in the fair value of an asset or a liability attributable to a particular risk (a “fair value” hedge), or (3) an instrument that is held as a non-hedge derivative. Changes in the fair value of highly effective cash flow hedges, to the extent that the hedge is effective, are recorded in AOCL, until earnings are affected by the hedged transaction (i.e. until periodic settlements of a variable-rate liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the transaction) is recorded in current-period earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in current-period earnings. Changes in the fair value of non-hedging instruments are reported in current-period earnings.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

5. DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The Operating Partnership formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) forecasted transactions. The Operating Partnership also assesses and documents, both at the hedging instrument’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. When the Operating Partnership determines that a derivative is not (or has ceased to be) highly effective as a hedge, the Operating Partnership discontinues hedge accounting prospectively.

During the nine months ended September 30, 2003, the Operating Partnership entered into and subsequently terminated a treasury lock agreement to hedge the change in the fair market value of the MandatOry Par Put Remarketable Securities (“MOPPRS”) issued by the Operating Partnership. The termination of this treasury lock agreement resulted in a payment of $1.5 million to the Operating Partnership. Because this gain was offset by an increase in the fair value of the MOPPRS of $1.5 million, no gain or loss was recognized during the nine months ended September 30, 2003.

In addition, during the nine months ended September 30, 2003, the Operating Partnership entered into and subsequently terminated three interest rate swap agreements related to fixed rate financing, which effectively locked the LIBOR swap rate at 3.92%. These swap agreements were designated as cash flow hedges and the effective portion of the cumulative gain on these derivative instruments was $3.8 million at September 30, 2003 and is being reported as a component of AOCL in partners’ capital. These amounts will be recognized into earnings in the same period or periods during which the hedged transaction affects earnings. The Operating Partnership also entered into two interest rate swaps related to a floating rate credit facility. The swaps effectively fix the LIBOR rate on $20.0 million of floating rate debt at 0.99% from August 1, 2003 to January 1, 2004 and at 1.59% from January 2, 2004 until May 31, 2005. These swap agreements are designated as cash flow hedges and the effective portion of the cumulative loss on these derivative instruments was nominal at September 30, 2003. The Operating Partnership expects that the portion of the cumulative loss recorded in AOCL at September 30, 2003 associated with these derivative instruments, which will be recognized within the next 12 months, will be approximately $1.3 million.

At September 30, 2003, approximately $4.0 million of deferred financing costs from past cash flow hedging instruments remain in AOCL. These costs will be recognized into earnings as the underlying debt is repaid. The Operating Partnership expects that the portion of the cumulative loss recorded in AOCL at September 30, 2003 associated with these derivative instruments, which will be recognized within the next 12 months, will be approximately $2.2 million.

6. OTHER COMPREHENSIVE INCOME

Other comprehensive income represents net income plus the results of certain non-partners’ capital changes not reflected in the Consolidated Statements of Income. The components of other comprehensive income are as follows ($ in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003		2002
Net income	$	23,637	$	17,329		$	48,347	$	80,375
Unrealized gains/(losses) on cash flow and fair value hedges		3,366		(2,545	)		3,842		(2,134	)
Amortization of past hedges		463		386			1,360		1,157
		3,829		(2,159	)		5,202		(977	)
	$	27,466	$	15,170		$	53,549	$	79,398

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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

7. DISCONTINUED OPERATIONSANDTHE IMPAIRMENTOF LONG-LIVED ASSETS

In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of” and the accounting and reporting provisions for disposals of a segment of a business as addressed in Accounting Principles Board (“APB”) Opinion 30, “Reporting the Results of Operations-Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 is effective as of January 1, 2002 and extends the reporting requirements of discontinued operations to include those long-lived assets which:

(1) are classified as held for sale at September 30, 2003 as a result of disposal activities that were initiated subsequent to January 1, 2002 or

(2) were sold during 2002 and 2003 as a result of disposal activities that were initiated subsequent to January 1, 2002.

Per SFAS 144, those long-lived assets which were sold during 2002 and resulted from disposal activities initiated prior to January 1, 2002 should be accounted for in accordance with SFAS 121 and APB 30. During 2002, the Operating Partnership sold certain properties which resulted from disposal activities initiated prior to January 1, 2002, and the gain realized on the sale is appropriately included in the gain on disposition of depreciable assets in the Operating Partnership’s Consolidated Statements of Income.

The table below sets forth the net operating results and net carrying value of 3.3 million square feet of property sold during 2002 and 2003 and 2.5 million square feet of property and 88 apartment units held for sale at September 30, 2003. These were a result of disposal activities that were initiated subsequent to the effective date of SFAS 144 and are classified as discontinued operations in the Operating Partnership’s Consolidated Statements of Income ($ in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003		2002
Total revenue	$	5,123	$	13,007		$	20,834	$	38,774
Rental operating expenses		1,347		4,023			5,507		11,320
Depreciation and amortization		372		2,946			2,216		8,746
Interest expense		—		200			—		200
Income before gain/(loss) on disposition of discontinued operations		3,404		5,838			13,111		18,508
Gain/(loss) on disposition of discontinued operations		12,113		(3,216	)		13,303		(1,080	)
Total discontinued operations	$	15,517	$	2,622		$	26,414	$	17,428
Net carrying value	$	113,987	$	312,501		$	113,987	$	312,501

In addition, SFAS 144 requires that a long-lived asset classified as held for sale be measured at the lower of the carrying value or fair value less cost to sell. At September 30, 2003, because there were no properties held for sale with a carrying value greater than their fair value less cost to sell, no impairment loss was recognized during the nine months ended September 30, 2003.

SFAS 144 also requires that the carrying value of a long-lived asset classified as held and used be compared to the sum of its estimated future undiscounted cash flows. If the carrying value is greater than the sum of its undiscounted future cash flows, an impairment loss should be recognized. At September 30, 2003, because there were no properties with a carrying value exceeding the sum of their undiscounted future cash flows, no impairment loss was recognized during the nine months ended September 30, 2003.

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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

8. ADOPTIONOF NEW ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”), which rescinds Statement No. 4, which required all gains and losses from the extinguishment of debt to be aggregated, and if material, classified as an extraordinary item, net of related income tax effect. The provisions of SFAS 145 related to the rescission of Statement No. 4 are effective for financial statements issued for fiscal years beginning after May 15, 2002. The statement also requires gains and losses from the extinguishment of debt classified as an extraordinary item in prior periods presented that do not meet the criteria in APB Opinion 30 for classification as an extraordinary item to also be reclassified. The Operating Partnership adopted SFAS 145 in the first quarter of 2003. In accordance with the statement, the Operating Partnership reclassified losses from the extinguishment of debt of $378,000 recorded as an extraordinary item to interest expense in its Consolidated Statements of Income for the three and nine months ended September 30, 2002.

In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”), which amends FASB No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements related to the method of accounting for stock-based employee compensation and the effect of the method used on reported results. (See Note 11 for the required disclosure under SFAS 148). The standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. On January 1, 2003, the Operating Partnership adopted the fair value recognition provision prospectively for all awards granted after January 1, 2003. Under this provision, total compensation expense related to stock options is determined using the fair value of the stock options on the date of grant and is recognized on a straight-line basis over the option vesting period. Prior to 2003, the Operating Partnership accounted for stock options under this plan under the guidance of APB Opinion 25 “Accounting for Stock Issued to Employees and Related Interpretations”.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“VIEs”), the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights and to determine when and which business enterprise should consolidate the VIEs. This new model applies when either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional financial support. In addition, FIN 46 requires additional disclosures. FIN 46 is currently in effect for the Operating Partnership’s interests in VIEs acquired subsequent to January 31, 2003. As a result of FASB Staff Position FIN 46-6, the Operating Partnership is deferring the application of FIN 46 for interests in VIEs or potential VIEs owned at January 31, 2003 until the amended effective date of December 31, 2003 in anticipation of additional guidance to be provided by the FASB. The Operating Partnership currently has 15 joint ventures with unrelated investors in which application of FIN 46 will be deferred. The Operating Partnership has retained minority equity interests in these joint ventures ranging from 20.00% to 50.00%. These joint ventures were formed for the development, management and leasing of office, industrial and retail properties. (See Note 2 for further discussion.) FIN 46 requires the Operating Partnership to disclose its maximum exposure to loss as a result of its involvement with these entities, which would be $101.1 million assuming the Operating Partnership would be required to fully satisfy its debt guarantees and experiences a complete loss of its equity investment in such entities. Transactions between the Operating Partnership and these entities resulted in a total of $3.2 million of management, development and commission fee income to the Operating Partnership for the nine months ended September 30, 2003 and 2002. Currently, the impact of FIN 46 on the Operating Partnership’s financial condition and results of operations cannot be reasonably estimated.

14

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

8. ADOPTIONOF NEW ACCOUNTING PRONOUNCEMENTS - Continued

In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of this Statement and still existing at the beginning of the interim period of adoption. As of September 30, 2003, the provisions of SFAS 150 do not have a material impact on the Operating Partnership’s financial condition or results of operations. However, the Operating Partnership believes the implementation of FIN 46 at December 31, 2003, as mentioned above, may result in minority interest in VIEs, which is classified as non-controlling interests in finite-life entities under SFAS 150. At its October 29, 2003 meeting, the FASB voted to defer indefinitely SFAS 150 as it relates to non-controlling interests in finite-life entities.

For a discussion of the adoption of other new accounting pronouncements, see also Notes 5 and 10.

9. SEGMENT INFORMATION

The sole business of the Operating Partnership is the acquisition, development and operation of rental real estate properties. The Operating Partnership operates office, industrial and retail properties and apartment units. There are no material inter-segment transactions.

The Operating Partnership’s Chief Operating Officer assesses and measures operating results based upon property level net operating income. The operating results for the individual assets within each property type have been aggregated since the Chief Operating Officer evaluates operating results and allocates resources on a property-by-property basis within the various property types.

15

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

9. SEGMENT INFORMATION - Continued

The accounting policies of the segments are the same as those of the Operating Partnership. Further, all operations are within the United States and no customer comprises more than 10.0% of consolidated revenues. The following table summarizes the rental revenue and net operating income for the three and nine months ended September 30, 2003 and 2002 and total assets at September 30, 2003 and 2002 for each reportable segment ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Rental Revenue (1):
Office segment	$	88,366		$	91,042		$	257,998		$	271,959
Industrial segment		8,765			8,266			26,102			25,339
Retail segment		9,513			9,923			30,591			29,794
Apartment segment		279			274			840			812
Total Rental Revenue	$	106,923		$	109,505		$	315,531		$	327,904
Net Operating Income (1):
Office segment	$	56,126		$	60,820		$	163,763		$	183,113
Industrial segment		6,922			6,432			20,498			20,262
Retail segment		6,626			7,406			21,695			21,136
Apartment segment		142			161			434			485
Total Net Operating Income	$	69,816		$	74,819		$	206,390		$	224,996
Reconciliation to income before gain/(loss) on disposition of land and depreciable assets and discontinued operations:
Depreciation and amortization	$	(31,536	)	$	(29,871	)	$	(95,752	)	$	(86,992	)
Interest expense		(28,866	)		(27,666	)		(85,509	)		(80,290	)
General and administrative expenses		(6,046	)		(4,132	)		(17,670	)		(18,058	)
Litigation reserve		—			(2,700	)		—			(2,700	)
Interest and other income		2,326			2,647			8,345			8,371
Equity in earnings of unconsolidated affiliates		1,562			1,198			2,750			6,072
Income before gain/(loss) on disposition of land and depreciable assets and discontinued operations	$	7,256		$	14,295		$	18,554		$	51,399
							September 30,
							2003			2002
Total Assets:
Office segment							$	2,594,636		$	2,700,688
Industrial segment								341,701			326,578
Retail segment								287,472			285,373
Apartment segment								12,263			12,218
Partnership and other								151,764			144,658
Total Assets							$	3,387,836		$	3,469,515

(1) Net of discontinued operations.

10. COMMITMENTSAND CONTINGENCIES

Joint Ventures

In connection with several of our joint venture partners with unaffiliated parties, the Operating Partnership has agreed to guarantee certain rent shortfalls and re-tenanting costs for certain properties contributed or sold to the joint ventures. As of September 30, 2003, the Operating Partnership has $12.9 million accrued for obligations related to these agreements. The Operating Partnership believes that its estimates related to these agreements are adequate. However, if their assumptions and estimates prove to be incorrect, future losses may occur.

16

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

10. COMMITMENTSAND CONTINGENCIES - Continued

Certain properties owned in joint ventures with unaffiliated parties have buy/sell options that may be exercised to acquire the other partner’s interest by either the Operating Partnership or its joint venture partner if certain conditions are met as set forth in the respective joint venture agreement. The Operating Partnership’s partner in SF-HIW Harborview, LP has the right to put its 80.0% equity interest in the partnership to the Operating Partnership in cash at anytime during the one-year period commencing on September 11, 2014. The value of the equity interest will be determined based upon the then fair market value of SF-HIW Harborview, LP assets and liabilities.

Other Guarantees

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which changes the accounting for, and disclosure of, certain guarantees. Beginning with transactions entered into after December 31, 2002, certain guarantees are to be recorded at fair value, which is different from prior practice, under which a liability was recorded only when a loss was probable and could be reasonably estimated. In general, the change applies to contracts or indemnification agreements that contingently require the Operating Partnership to make payments to a guaranteed third-party based on changes in an underlying asset, liability, or equity security of the guaranteed party. However, a guarantee or an indemnification whose existence prevents the guarantor from being able to either account for a transaction as the sale of an asset that is related to the guarantee’s underlying or recognize in earnings the profit from that sale transaction is exempt from the interpretation. The disclosure requirements in this Interpretation are effective for interim and annual periods ending after December 15, 2002. The following is a discussion of the various guarantees in effect at September 30, 2003 that fall under the requirements of this Interpretation.

In December 2000, the Operating Partnership guaranteed its 80.0% partner in MG-HIW, LLC joint venture a minimum internal rate of return on $50.0 million of their equity investment in the remaining assets of the joint venture (the “Orlando assets”). On July 29, 2003, the Operating Partnership entered into an option agreement to acquire Miller Global’s 80.0% interest in the Orlando assets for between $62.5 and $65.2 million depending on the closing date and the distributions from the joint venture prior to closing. Based on the terms of the agreement, the purchase option price range satisfies the internal rate of return guarantee. In connection with the option agreement, the Operating Partnership entered into a letter of credit in the amount of $7.5 million in favor of Miller Global, which can be drawn by Miller Global in the event the Operating Partnership does not exercise its option to purchase their 80.0% interest in the remaining assets of MG-HIW, LLC by March 24, 2004. Given the Operating Partnership intends to exercise its option in March 2004, the fair value of the letter of credit guarantee liability does not have a material impact on the Operating Partnership’s financial condition or results of operations. (See Note 3 for further discussion).

In connection with the Des Moines joint venture guarantees in place prior to January 1, 2003, the maximum potential amount of future payments the Operating Partnership could be required to make under the guarantees is $25.7 million. Of this amount, $8.6 million arose from housing revenue bonds that require credit enhancements in addition to the real estate mortgages. The bonds bear a floating interest rate, which currently averages 1.0% and mature in 2015. Guarantees of $9.6 million will expire upon two industrial buildings becoming 93.8% and 95.0% leased, respectively. Currently, these buildings are 84.0% and 63.0% leased, respectively. The remaining $7.5 million in guarantees relates to loans on four office buildings that were in the lease-up phase at the time the loans were initiated. Each of the loans will expire by May 2008. The average occupancy of the four buildings at September 30, 2003 is 91.0%. If the joint ventures are unable to repay the outstanding balance under the loans, the Operating Partnership will be required, under the terms of the agreements, to repay the outstanding balance. Recourse provisions exist to enable the Operating Partnership to recover some or all of its losses from the joint ventures’ assets and/or the other partner. The joint ventures currently generate sufficient cash flow to cover the debt service required by the loans.

17

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

10. COMMITMENTSAND CONTINGENCIES - Continued

In connection with the RRHWoods, LLC joint venture, the Operating Partnership renewed its guarantee of $6.2 million to a bank in July 2003. The bank provides a letter of credit securing industrial revenue bonds, which mature in 2015. The Operating Partnership would be required to perform under the guarantee should the joint venture be unable to repay the bonds. The Operating Partnership has recourse provisions in order to recover from the joint venture’s assets and the other partner for amounts paid in excess of its proportionate share. Given that the property collateralizing the bonds is 100.0% leased and currently generates sufficient cash flow to cover the debt service required by the bond financing, the fair value of the guarantee liability does not have a material impact on the Operating Partnership’s financial condition or results of operations.

With respect to the Plaza Colonnade, LLC joint venture, the Operating Partnership has included $2.8 million in other liabilities and adjusted the investment in unconsolidated affiliates by $2.8 million on its consolidated balance sheet at September 30, 2003 related to two separate guarantees of a construction loan agreement and a construction completion agreement. The construction loan matures in February 2006, with two one-year options to extend the maturity date that are conditional on completion and lease-up of the project. The term of the construction completion agreement requires the core and shell of the building to be completed by December 15, 2005. Both guarantees arose from the formation of the joint venture to construct an office building. If the joint venture is unable to repay the outstanding balance under the construction loan agreement or complete the construction of the office building, the Operating Partnership would be required, under the terms of the agreements, to repay its 50.0% share of the outstanding balance under the construction loan and complete the construction of the office building. The maximum potential amount of future payments by the Operating Partnership under these agreements is $34.9 million. No recourse provisions exist that would enable the Operating Partnership to recover from the other partner amounts paid under the guarantee. However, given that the loan is collateralized by the building, the Operating Partnership and its partner could obtain and liquidate the building to recover the amounts paid should they be required to perform under the guarantee.

Dispositions

In connection with the disposition of 225,000 square feet of property, fully leased to Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., the Operating Partnership agreed to guarantee any rent shortfalls and re-tenanting costs for a five year period of time from the date of sale. The Operating Partnership’s contingent liability with respect to such guarantee as of September 30, 2003 is $17.5 million. Because of this guarantee, in accordance with GAAP, the Operating Partnership deferred the gain of approximately $6.9 million, which will be recognized when the contingency period is concluded.

In connection with the disposition of 298,000 square feet of property, fully leased to Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., the Operating Partnership agreed to guarantee, over various contingency periods through April 2006, any rent shortfalls on certain space. The Operating Partnership’s contingent liability with respect to such guarantee as of September 30, 2003 is $4.4 million. Because of this guarantee, in accordance with GAAP, the Operating Partnership deferred $4.4 million of the total $8.4 million gain. The deferred portion of the gain will be recognized when each contingency period is concluded.

Litigation

The Operating Partnership is a party to a variety of legal proceedings arising in the ordinary course of its business. The Operating Partnership believes that it is adequately covered by insurance. Accordingly, none of such proceedings are expected to have a material adverse effect on the Operating Partnership’s business, financial condition and results of operations.

18

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

11. STOCK-BASED COMPENSATION

In accordance with SFAS 148, the Operating Partnership has included $45,059 of amortization related to the vesting of stock options granted during the nine months ended September 30, 2003 in general and administrative expenses in its Consolidated Statement of Income. In addition, the Operating Partnership has included the total grant value of $308,985 in partners’ capital in its Consolidated Balance Sheet at September 30, 2003. See below for the amounts that would have been deducted from net income if the Operating Partnership had elected to expense the fair value of all stock option awards that had vested rather than those awards issued subsequent to January 1, 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
	($ in thousands, except per unit amounts)
Net income, as reported	$	23,637		$	17,329		$	48,347		$	80,375
Add: Stock option expense included in reported net income		19			—			45			—
Deduct: Total stock option expense determined under fair value recognition method for all awards		(190	)		(217	)		(558	)		(651	)
Pro forma net income	$	23,466		$	17,112		$	47,834		$	79,724
Basic net income per common unit – as reported	$	0.27		$	0.16		$	0.43		$	0.95
Basic net income per common unit – pro forma	$	0.27		$	0.16		$	0.41		$	0.94
Diluted net income per common unit – as reported	$	0.27		$	0.16		$	0.43		$	0.95
Diluted net income per common unit – pro forma	$	0.27		$	0.16		$	0.41		$	0.93

19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with all of the financial statements appearing elsewhere in the report and is based primarily on the consolidated financial statements of the Operating Partnership.

Disclosure Regarding Forward-looking Statements

Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section and under the heading “Business.” You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:

• speculative development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative to customer demand;

• the financial condition of our customers could deteriorate;

• we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;

• we may not be able to lease or release space quickly or on as favorable terms as old leases;

• an unexpected increase in interest rates would increase our debt service costs;

• we may not be able to continue to meet our long-term liquidity requirements on favorable terms;

• we may not be able to obtain additional capital to finance our future cash needs on favorable terms, if at all;

• we could lose key executive officers; and

• our southeastern and midwestern markets may suffer additional declines in economic growth.

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the cautionary statements we make in “Business - Risk Factors” set forth in our 2002 Annual Report.

Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.

Overview

The Operating Partnership is managed by its general partner, the Company, a self-administered and self-managed equity REIT that began operations through a predecessor in 1978 and completed its initial public offering in 1994. The Company is one of the largest owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At September 30, 2003, the Company:

• owned 483 in-service office, industrial and retail properties, encompassing approximately 37.2 million rentable square feet;

• owned an interest (50.0% or less) in 62 in-service office and industrial properties, encompassing approximately 6.5 million rentable square feet, and 418 apartment units;

• owned 1,377 acres of undeveloped land suitable for future development; and

• are developing an additional five properties, which will encompass approximately 835,000 rentable square feet (including one property encompassing 285,000 rentable square feet that we are developing with a 50.0% joint venture partner).

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The Company conducts substantially all of its activities through, and substantially all of its interests in the properties are held directly or indirectly by, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. At September 30, 2003, the Company owned 88.8% of the Common Units in the Operating Partnership.

Property Information

The following table sets forth certain information with respect to the Company’s wholly owned in-service and development properties (excluding apartment units) as of September 30, 2003 and 2002:

	September 30, 2003			September 30, 2002
	Rentable Square Feet	Percent Leased/ Pre-Leased		Rentable Square Feet	Percent Leased/ Pre-Leased
In-Service:
Office	25,710,000	79.4	%	25,861,000	86.3	%
Industrial	9,934,000	88.0	%	10,468,000	86.2	%
Retail (1)	1,527,000	96.3	%	1,650,000	95.4	%
Total or Weighted Average	37,171,000	82.4	%	37,979,000	86.7	%
Development:
Completed—Not Stabilized
Office	140,000	30.0	%	568,000	17.3	%
Industrial	60,000	50.0	%	136,000	29.0	%
Retail	—	—		20,000	90.0	%
Total or Weighted Average	200,000	36.0	%	724,000	21.5	%
In Process
Office	—	100.0	%	100,000	42.0	%
Industrial	350,000	—		60,000	20.0	%
Retail	—	—		—	—
Total or Weighted Average	350,000	100.0	%	160,000	33.8	%
Total:
Office	25,850,000			26,529,000
Industrial	10,344,000			10,664,000
Retail (1)	1,527,000			1,670,000
Total or Weighted Average	37,721,000			38,863,000

(1) Excludes basement space of 474,000 square feet.

The following summarizes the Company’s capital recycling program since the beginning of 2002:

	Nine Months Ended September 30, 2003		Year Ended 2002
Office, Industrial and Retail Properties
(rentable square feet in thousands)
Dispositions	(1,310	)	(2,270	)
Developments Placed In-Service	131		2,214
Redevelopments	(145	)	(52	)
Acquisitions	1,385		—
Net Change	61		(108	)

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Customer Diversification

The following table sets forth information concerning the 20 largest customers of the Company’s wholly-owned properties as of September 30, 2003 ($ in thousands):

Customers	Number of Leases	Rental Square Feet	Annualized Rental Revenue (1)		Percent of Total Annualized Rental Revenue(1)		Average Remaining Lease Term in Years
Federal Government	60	626,943	$	12,948	2.99	%	5.1
AT&T	8	612,092		11,493	2.65		4.2
PricewaterhouseCoopers	6	297,795		6,879	1.59		6.6
State of Georgia	10	359,565		6,858	1.58		5.6
Sara Lee	10	1,230,534		4,789	1.11		1.8
IBM	7	215,737		4,566	1.05		2.0
Volvo	7	264,717		3,721	0.86		5.5
Bell South	7	175,106		3,654	0.84		1.1
Northern Telecom	1	246,000		3,651	0.84		4.4
Lockton Companies	10	132,718		3,294	0.76		11.4
US Airways	5	295,046		3,216	0.74		4.2
BB&T	8	241,075		3,167	0.73		7.4
Bank of America	23	146,842		2,979	0.69		3.5
Business Telecom	5	147,379		2,945	0.68		1.7
WorldCom and Affiliates	13	144,623		2,858	0.66		2.6
T-Mobile USA	3	120,561		2,806	0.65		2.7
Ikon	7	181,361		2,530	0.58		4.1
Carlton Fields	2	95,771		2,435	0.56		0.8
Ford Motor Company	2	125,989		2,425	0.56		6.4
CHS Professional Services	17	138,888		2,314	0.53		3.4
Total	211	5,798,742	$	89,528	20.65	%	4.4

(1) Annualized Rental Revenue is September 2003 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements contained elsewhere in this Quarterly Report. Our Consolidated Financial Statements include the accounts of the Operating Partnership and its majority-controlled affiliates. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates.

Certain of our significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on our Consolidated Financial Statements. Management has reviewed our critical accounting policies and estimates with the audit committee of the Company’s Board of Directors and the Company’s independent auditors. For a more complete discussion of our critical accounting policies and estimates, see our 2002 Annual Report on Form 10-K.

Results of Operations

Known Trends and Outlook

We expect net income and funds from operations to be lower in the fourth quarter of 2003 as compared to the fourth quarter of 2002 due to the following factors:

• lower occupancy;

• lower first year cash rents;

• asset sales;

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• the bankruptcies of WorldCom and US Airways in 2002; and

• general economic conditions and unemployment in each of our primary markets, which has led to a decrease in demand for office and industrial space.

Outlook

We are beginning to see a modest improvement in positive employment trends in a number of our markets and an improving economic climate in the Southeast. However, we expect a lag between positive employment growth and positive absorption of office space due to the significant amount of under-utilized space and space available for sublease in our markets.

Over the next 12-15 months, we anticipate that occupancy in our in-service portfolio will either remain at current levels or increase slightly. This outlook is based on the level of leasing activity we have experienced over the past 12 months, which we expect to continue through 2004. In 2004, leases on approximately 5.9 million square feet of space, or 19.1% of our portfolio will expire. This square footage represents approximately 15.4% of our annualized revenue. As of October 24, 2003, we have leased 1.7 million square feet of space with 2004 start dates, or 28.8% of the square footage expiring next year.

The following table sets forth scheduled lease expirations at the Company’s wholly-owned in-service properties as of September 30, 2003, assuming no customer exercises renewal options.

Lease Expiring	Number of Leases Expiring	Rentable Square Feet Subject to Expiring Leases	Percentage of Leased Square Footage Represented by Expiring Leases		Annualized Rental Revenue Under Expiring Leases (1)		Average Annual Rental Rate Per Square Foot for Expirations		Percent of Annualized Rental Revenue Represented by Expiring Leases
	($ in thousands)
Remainder of 2003 (2)	301	1,849,857	6.0	%	$	23,597	$	12.76	5.4	%
2004	705	5,875,921	19.1			66,496		11.32	15.4
2005	694	4,927,008	16.1			73,485		14.91	17.0
2006	570	4,249,164	13.9			65,222		15.35	15.1
2007	327	3,549,153	11.6			40,489		11.41	9.3
2008	322	3,545,841	11.6			51,863		14.63	12.0
2009	99	1,809,020	5.9			29,037		16.05	6.7
2010	87	1,345,904	4.4			26,397		19.61	6.1
2011	62	1,055,995	3.4			21,736		20.58	5.0
2012	49	644,351	2.1			12,915		20.04	3.0
Thereafter	177	1,793,682	5.9			21,808		12.16	5.0
	3,393	30,645,896	100.0	%	$	433,045	$	14.13	100.0	%

(1) Annualized Rental Revenue is September 2003 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.

(2) Includes 509,000 square feet of leases that are on a month to month basis or 1.0% of total annualized revenue.

We also anticipate continuing our capital recycling program. At September 30, 2003, we had 2.6 million square feet of office properties and 248.6 acres of land under letter of intent or contract for sale in various transactions with a carrying value of $145.5 million and an aggregate sales price of $175.0 million. These transactions are subject to customary closing conditions, including zoning, due diligence and documentation, and are projected to close over the next 12 months. However, we can provide no assurance that all or parts of these transactions will be consummated.

We intend to use the net proceeds from these asset dispositions to repay debt, fund acquisitions and for other general corporate purposes. The disposal of non-core or other properties can generate attractive returns although any net decrease in our property portfolio generally tends to result in lower net income. In addition, the majority of assets sold or held for sale generally have occupancy levels above the average occupancy of our total portfolio and, as a result, the sale of these assets may lower the overall occupancy rate of our portfolio.

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Three and Nine Months Ended September 30, 2003

As described in Note 7 to the Consolidated Financial Statements, we reclassified the operations and/or gain/(loss) from disposal of certain properties to discontinued operations if the properties were either sold during 2002 and 2003 or were held for sale at September 30, 2003 and met certain conditions as stipulated by Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets” (“SFAS 144”). Accordingly, properties sold during 2002 that did not meet certain conditions as stipulated by SFAS 144 were not reclassified as discontinued operations.

The following table sets forth information regarding our results of operations for the three and nine months ended September 30, 2003 and 2002 ($ in millions):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2003			2002			$ Change			2003			2002			$ Change
Rental revenue	$	106.9		$	109.5		$	(2.6	)	$	315.5		$	327.9		$	(12.4	)
Operating expenses:
Rental property		37.1			34.7			2.4			109.1			102.9			6.2
Depreciation and amortization		31.5			29.9			1.6			95.7			87.0			8.7
Interest expense:
Contractual		28.1			27.3			0.8			83.3			79.3			4.0
Amortization of deferred financing costs		0.8			0.3			0.5			2.2			1.0			1.2
		28.9			27.6			1.3			85.5			80.3			5.2
General and administrative (includes $3.7 of nonrecurring compensation and management fee expense in the nine months ending September 30, 2002)		6.1			4.1			2.0			17.7			18.1			(0.4	)
Litigation reserve		—			2.7			(2.7	)		—			2.7			(2.7	)
Total operating expenses		103.6			99.0			4.6			308.0			291.0			17.0
Other income:
Interest and other income		2.3			2.6			(0.3	)		8.3			8.4			(0.1	)
Equity in earnings of unconsolidated affiliates		1.6			1.2			0.4			2.8			6.1			(3.3	)
		3.9			3.8			0.1			11.1			14.5			(3.4	)
Income before gain/(loss) on disposition of land and depreciable assets and discontinued operations		7.2			14.3			(7.1	)		18.6			51.4			(32.8	)
Gain on disposition of land		1.1			0.7			0.4			3.3			6.5			(3.2	)
(Loss)/gain on disposition of depreciable assets		(0.2	)		(0.3	)		0.1			—			5.1			(5.1	)
Income from continuing operations		8.1			14.7			(6.6	)		21.9			63.0			(41.1	)
Discontinued operations:
Income from discontinued operations		3.4			5.8			(2.4	)		13.1			18.5			(5.4	)
Gain/(loss) on sale of discontinued operations		12.1			(3.2	)		15.3			13.3			(1.1	)		14.4
		15.5			2.6			12.9			26.4			17.4			9.0
Net income		23.6			17.3			6.3			48.3			80.4			(32.1	)
Distributions on preferred units		(7.7	)		(7.7	)		—			(23.1	)		(23.1	)		—
Net income available for common unitholders	$	15.9		$	9.6		$	6.3		$	25.2		$	57.3		$	(32.1	)

Three Months Ended September 30, 2003. Rental revenue from continuing operations decreased $2.6 million, or 2.4%, from $109.5 million for the three months ended September 30, 2002 to $106.9 million for the three months ended September 30, 2003. The decrease was primarily a result of a decrease in average occupancy rates from 84.8% for the three months ended September 30, 2002 to 81.6% for the three months ended September 30, 2003. The decrease in average occupancy rates was primarily a result of the bankruptcies of WorldCom and US Airways, which decreased average occupancy rates by 2.5% and rental revenue from continuing operations by $4.5 million. In addition, during 2002 and the nine months ended September 30, 2003, approximately 2.3 million square feet of development properties were placed in-service which have leased-up slower than expected and, as a result, have decreased average occupancy rates by 1.4%. In addition, lease termination fees have decreased and rent abatements have increased for the three months ended September 30, 2003. Partly offsetting these decreases was an increase of $3.0 million in rental revenue from continuing operations, which resulted from the acquisition of certain MG-HIW, LLC assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion).

Same property rental revenue generated from the 33.8 million square feet of our 446 wholly-owned in-service properties on January 1, 2002, decreased $8.1 million, or 7.4%, for the three months ended September 30, 2003

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compared to the three months ended September 30, 2002. This decrease is primarily a result of lower same property average occupancy, which decreased from 87.4% in 2002 to 83.9% in 2003. The decrease in same property average occupancy rates was primarily a result of the bankruptcies of WorldCom and US Airways, which decreased same property average occupancy rates by 2.8% and same property rental revenue from continuing operations by $4.5 million.

During the three months ended September 30, 2003, 253 second generation leases representing 1.7 million square feet of office, industrial and retail space were executed. On a straight-line rent comparison basis, the average rate per square foot over the lease term for leases executed in the three months ended September 30, 2003 was 1.6% lower than the rent paid by previous customers.

Rental operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $2.4 million, or 6.9%, from $34.7 million for the three months ended September 30, 2002 to $37.1 million for the three months ended September 30, 2003. The increase was a result of an increase in certain fixed operating expenses that do not vary with net changes in our occupancy percentages and an increase in operating expenses which resulted from the acquisition of certain MG-HIW assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion). In addition, we placed 2.3 million square feet of development properties in service during 2002 and 2003 which resulted in an increase in rental operating expenses from continuing operations.

Rental operating expenses as a percentage of rental revenue increased from 31.7% for the three months ended September 30, 2002 to 34.7% for the three months ended September 30, 2003. The increase was a result of the increases in rental operating expenses as described above and a decrease in rental revenue, primarily due to lower average occupancy. The decrease in average occupancy rates was primarily a result of the bankruptcies of WorldCom and US Airways, which decreased average occupancy rates by 2.5% and rental revenue from continuing operations by $4.5 million.

Same property rental operating expenses, which are the expenses of our 446 wholly-owned in-service properties on January 1, 2002, increased $242,498, or 0.7%, for the three months ended September 30, 2003, compared to the three months ended September 30, 2002. The increase was a result of increases in certain fixed operating expenses that do not vary with net changes in our occupancy percentages.

Same property rental operating expenses as a percentage of related revenue increased from 31.5% for the three months ended September 30, 2002 to 34.2% for the three months ended September 30, 2003. The increase in these expenses as a percentage of related revenue was a result of the increase in same property rental operating expenses as described above and a decrease in same property rental revenue, primarily due to the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.8% decrease in same property average occupancy rates and a $4.5 million decrease in same property rental revenue for the three months ended September 30, 2003.

Depreciation and amortization from continuing operations for the three months ended September 30, 2003 and 2002 was $31.5 million and $29.9 million, respectively. The increase of $1.6 million, or 5.4%, was due to an increase in amortization related to leasing commissions and tenant improvement expenditures for properties placed in-service during 2002 and the nine months ended September 30, 2003 and the write-off of deferred leasing costs and tenant improvements for customers who vacated their space prior to lease expiration. In addition, the increase resulted from the acquisition of certain MG-HIW assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion). These increases were partially offset by a decrease in depreciation for properties disposed of during 2002 that are not classified as discontinued operations in accordance with SFAS 144.

Interest expense from continuing operations increased $1.3 million, or 4.7%, from $27.6 million for the three months ended September 30, 2002 to $28.9 million for the three months ended September 30, 2003. The increase was primarily attributable to the decrease in capitalized interest from $1.7 million for the three months ended September 30, 2002 to $276,488 for the three months ended September 30, 2003 as a result of a decrease in development activity in 2003. Partly offsetting this increase was a decrease in the average outstanding debt balance from the third quarter of 2002 to the third quarter of 2003. Interest expense for the three months ended September 30, 2003 and 2002 included $818,542 and $347,384, respectively, of amortization of deferred financing costs. The increase of $471,158 was primarily a result of the refinancing of the MandatOry Par Put Remarketed Securities (“MOPPRS”). See “Liquidity and Capital Resources” for further discussion on the refinancing.

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General and administrative expenses as a percentage of total revenue, which includes rental revenue and interest and other income for both continuing and discontinued operations and equity in earnings of unconsolidated affiliates, was 5.3% for the three months ended September 30, 2003 and 3.2% for the three months ended September 30, 2002. The increase of 2.1% was primarily attributable to a decrease of capitalization of general and administrative costs due to the decrease in development activity in 2003 and an increase in deferred compensation as a result of the issuance of restricted stock during 2002 and the nine months ended September 30, 2003. In addition, rental revenue and interest and other income decreased for the three months ended September 30, 2002 to the three months ended September 30, 2003.

Interest and other income from continuing operations decreased $321,418, or 12.4%, from $2.6 million for the three months ended September 30, 2002 to $2.3 million for the three months ended September 30, 2003. The decrease was primarily due to a decrease in leasing and management fee income as a result of the acquisition of certain MG-HIW assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion) and a decrease in interest income due to the collection of notes receivable during 2002.

Equity in earnings of unconsolidated affiliates increased $362,930 from $1.2 million for the three months ended September 30, 2002 to $1.6 for the three months ended September 30, 2003. The increase was primarily a result of a charge to equity in earnings of $309,000 taken in 2002 as a result of a loss recognized by a certain joint venture related to an early extinguishment of debt and an increase in equity in earnings in 2003 of $214,000 as a result of a gain recognized by a certain joint venture related to the disposition of land in 2003. These increases were partly offset by a decrease in equity in earnings of $192,000 as a result of the acquisition of certain MG-HIW assets in July 2003, at which time the assets were consolidated and reported in our Consolidated Statements of Income. (See Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion)

Gain on disposition of land and depreciable assets increased $451,858 to $863,812 for the three months ended September 30, 2003 from $411,954 for the three months ended September 30, 2002. In the third quarter of 2003, the majority of the gain was comprised of a $1.1 million gain related to the disposition of 21.1 acres of land. In the third quarter of 2002, the majority of the gain was comprised of a $741,309 gain related to the disposition of 24.9 acres of land. Partly offsetting this gain was an impairment loss of $500,000 related to 58,206 square feet of office properties that did not meet certain conditions to be classified as discontinued operations, as described in Note 7 to the Consolidated Financial Statements.

In accordance with SFAS 144, we classified net income of $3.4 million and $5.8 million as discontinued operations for the three months ended September 30, 2003 and 2002, respectively. These amounts pertained to 3.3 million square feet of property sold during 2002 and 2003 and 2.5 million square feet of property and 88 apartment units held for sale at September 30, 2003. We also classified a gain of $12.1 million and a loss of $3.2 million as discontinued operations for the three months ended September 30, 2003 and 2002, respectively.

Nine Months Ended September 30, 2003. Rental revenue from continuing operations decreased $12.4 million, or 3.8%, from $327.9 million for the nine months ended September 30, 2002 to $315.5 million for the nine months ended September 30, 2003. The decrease was primarily a result of a decrease in average occupancy rates from 86.0% for the nine months ended September 30, 2002 to 81.5% for the nine months ended September 30, 2003. The decrease in average occupancy rates was primarily a result of the bankruptcies of WorldCom and US Airways, which decreased average occupancy rates by 2.5% and rental revenue from continuing operations by $10.7 million. In addition, during 2002 and the nine months ended September 30, 2003, approximately 2.3 million square feet of development properties were placed in-service which have leased-up slower than expected and, as a result, have decreased average occupancy rates by 1.4%. In addition, lease termination fees decreased and rent abatements increased for the nine months ended September 30, 2003. Partly offsetting these decreases was an increase of $3.0 million of rental revenue from continuing operations, which resulted from the acquisition of certain MG-HIW, LLC assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion).

Same property rental revenue, generated from 33.8 million square feet of our 446 wholly-owned in-service properties on January 1, 2002, decreased $19.9 million, or 6.1%, for the nine months ended September 30, 2003

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compared to the nine months ended September 30, 2002. This decrease is primarily a result of lower same property average occupancy, which decreased from 88.3% in 2002 to 84.2% in 2003. The decrease in same property average occupancy rates was primarily a result of the bankruptcies of WorldCom and US Airways, which decreased same property average occupancy rates by 2.7% and same property rental revenue from continuing operations by $10.7 million.

During the nine months ended September 30, 2003, 730 second generation leases representing 5.4 million square feet of office, industrial and retail space were executed. On a straight-line rent comparison basis, the average rate per square foot over the lease term for leases executed in the first nine months of 2003 was 0.1% lower than the rent paid by previous customers.

Rental operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $6.2 million, or 6.0%, from $102.9 million for the nine months ended September 30, 2002 to $109.1 million for the nine months ended September 30, 2003. The increase was a result of an increase in certain fixed operating expenses that do not vary with net changes in our occupancy percentages and an increase in operating expenses which resulted from the acquisition of certain MG-HIW assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion) In addition, we placed 2.3 million square feet of development properties in service during 2002 and 2003 which resulted in an increase in rental operating expenses from continuing operations.

Rental operating expenses as a percentage of rental revenue increased from 31.4% for the nine months ended September 30, 2002 to 34.6% for the nine months ended September 30, 2003. The increase was a result of the increases in rental operating expenses as described above and a decrease in rental revenue, primarily due to lower average occupancy. The decrease in average occupancy rates was primarily a result of the bankruptcies of WorldCom and US Airways, which decreased average occupancy rates by 2.5% and rental revenue from continuing operations by $10.7 million.

Same property rental operating expenses, which are the expenses of our 446 wholly-owned in-service properties on January 1, 2002, increased $2.3 million, or 2.3%, for the nine months ended September 30, 2003, compared to the nine months ended September 30, 2002. The increase was a result of an increase in certain fixed operating expenses that do not vary with net changes in our occupancy percentage.

Same property rental operating expenses as a percentage of related revenue increased from 30.9% for the nine months ended September 30, 2002 to 33.6% for the nine months ended September 30, 2003. The increase in these expenses as a percentage of revenue was a result of the increases described above and a decrease in same property rental revenue, primarily due to the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.7% decrease in same property average occupancy rates and a $10.7 million decrease in same property rental revenue for the nine months ended September 30, 2003. In addition, operating expenses of $568,947 that would have been paid by WorldCom if the leases were not rejected were paid by us and included in same property operating expenses during the nine months ended September 30, 2003.

Depreciation and amortization from continuing operations for the nine months ended September 30, 2003 and 2002 was $95.7 million and $87.0 million, respectively. The increase of $8.7 million, or 10.0%, was due to an increase in amortization related to leasing commissions and tenant improvement expenditures for properties placed in-service during 2002 and the nine months ended September 30, 2003 and the write-off of deferred leasing costs and tenant improvements for customers who vacated their space prior to lease expiration. In addition, the increase resulted from the acquisition of certain MG-HIW assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion). These increases were partially offset by a decrease in depreciation for properties disposed of during 2002 that are not classified as discontinued operations in accordance with SFAS 144.

Interest expense from continuing operations increased $5.2 million, or 6.5%, from $80.3 million for the nine months ended September 30, 2002 to $85.5 million for the nine months ended September 30, 2003. The increase was primarily attributable to the decrease in capitalized interest from $8.3 million for the nine months ended September 30, 2002 to $991,734 for the nine months ended September 30, 2003 as a result of a decrease in development activity in 2003. Partly offsetting this increase was a

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decrease in the average outstanding debt balance from the nine months ended September 30, 2002 to the nine months ended September 30, 2003. Interest expense for the nine months ended September 30, 2003 and 2002 included $2.2 million and $1.0 million, respectively, of amortization of deferred financing costs. The increase of $1.2 million was primarily a result of the refinancing of the MandatOry Par Put Remarketed Securities (“MOPPRS”). See “Liquidity and Capital Resources” for further discussion on the refinancing.

General and administrative expenses as a percentage of total revenue, which includes rental revenue and interest and other income for both continuing and discontinued operations and equity in earnings of unconsolidated affiliates, was 5.1% for the nine months ended September 30, 2003 and 4.7% for the nine months ended September 30, 2002. The increase was primarily a result of the decrease in capitalization of these costs due to the decrease in development activity in 2003 and an increase in deferred compensation as a result of the issuance of additional restricted stock during 2002 and the nine months ended September 30, 2003. In addition, rental revenue, interest and other income and equity in earnings of unconsolidated affiliates decreased from the nine months ended September 30, 2002 to the nine months ended September 30, 2003.

Interest and other income from continuing operations decreased $26,409, or 0.3%, from $8.4 million for the nine months ended September 30, 2002 to $8.3 million for the nine months ended September 30, 2003. The decrease primarily resulted from a decrease in leasing and management fee income as a result of the acquisition of certain MG-HIW assets in July 2003 (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion) and a decrease in interest income due to the collection of notes receivable during 2002.

Equity in earnings of unconsolidated affiliates decreased $3.3 million from $6.1 million for the nine months ended September 30, 2002 to $2.8 million for the nine months ended September 30, 2003. The decrease was primarily a result of a charge of $2.4 million which represents our proportionate share of the impairment loss of $12.1 million recorded by the MG-HIW, LLC joint venture in the nine months ended September 30, 2003 related to the acquisition of the assets of the MG-HIW, LLC joint venture (see Note 3 to the Operating Partnership’s Consolidated Financial Statements for further discussion) and lower occupancy in 2003 for certain joint ventures. Partly offsetting these decreases was an increase of $523,000 in equity in earnings in 2003 related to a charge of $309,000 taken in 2002 due to an early extinguishment of debt loss taken by a certain joint venture and an increase in equity in earnings in 2003 of $214,000 as a result of a gain recognized by a certain joint venture related to the disposition of land in 2003.

Gain on disposition of land and depreciable assets decreased $8.3 million to $3.3 million for the nine months ended September 30, 2003 from $11.6 million for the nine months ended September 30, 2002. In the nine months ended September 30, 2003, the majority of the gain was comprised of a $2.6 million gain related to the disposition of 33.5 acres of land and a gain of approximately $1.0 million related to the condemnation of 4.0 acres of Bluegrass land, which is discussed further in Note 4 to the Consolidated Financial Statements. Partly offsetting this gain was an impairment loss of $295,587 related to two land parcels held for sale at September 30, 2003. In the nine months ended September 30, 2002, the majority of the gain was comprised of a gain related to the disposition of 533,263 square feet of office properties that did not meet certain conditions to be classified as discontinued operations as described in Note 7 to the Consolidated Financial Statements and a gain on the disposition of 78.0 acres of land. Partly offsetting these gains was an impairment loss of $9.6 million related to 210,093 square feet of office properties that did not meet certain conditions to be classified as discontinued operations as described in Note 7 to the Consolidated Financial Statements.

In accordance with SFAS 144, we classified net income of $13.1 million and $18.5 million as discontinued operations for the nine months ended September 30, 2003 and 2002, respectively. These amounts pertained to 3.3 million square feet of property sold during 2002 and 2003 and 2.5 million square feet of property and 88 apartment units held for sale at September 30, 2003. We also classified a gain of $13.3 million and a loss of $1.1 million as discontinued operations for the nine months ended September 30, 2003 and 2002, respectively.

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Liquidity and Capital Resources

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Statement of Cash Flows. The following table sets forth the changes in the Operating Partnership’s cash flows from the first nine months of 2003 as compared to the first nine months of 2002 ($ in thousands):

	Nine Months Ended September 30,
	2003			2002			Change
Cash Provided By Operating Activities	$	130,032		$	174,090		$	(44,058	)
Cash (Used In)/Provided By Investing Activities		(31,283	)		75,766			(107,049	)
Cash Used in Financing Activities		(96,796	)		(236,836	)		140,040
Total Cash Flows	$	1,953		$	13,020		$	(11,067	)

Cash provided by operating activities was $130.0 million for the nine months ended September 30, 2003 and $174.1 million for the nine months ended September 30, 2002. The decrease of $44.1 million was primarily a result of lower net income due to a decrease in average occupancy rates for our wholly-owned portfolio and the bankruptcies of WorldCom and US Airways. In addition, the level of net cash provided by operating activities is affected by the timing of receipt of revenue and payment of expenses.

Cash used in investing activities was $31.3 million for the nine months ended September 30, 2003 and cash provided by investing activities was $75.8 million for the nine months ended September 30, 2002. The decrease of $107.0 million was primarily a result of a decrease in proceeds from dispositions of real estate assets of approximately $42.0 million, and an increase in additions to real estate assets of approximately $63.4 million for the nine months ended September 30, 2003.

Cash used in financing activities was $96.8 million for the nine months ended September 30, 2003 and $236.8 million for the nine months ended September 30, 2002. The decrease was primarily a result of a decrease of $141.1 million in net repayments on the unsecured revolving loan, mortgages and notes payable and a decrease of $29.3 million in distributions paid on Common Units, partly offset by a decrease of $4.7 million in proceeds from the sale of Common Units and an increase of $15.7 million for the redemption/repurchase of Common Units for the nine months ended September 30, 2003.

Capitalization. Our total indebtedness at September 30, 2003 was $1.6 billion and was comprised of $700.0 million of secured indebtedness with a weighted average interest rate of 7.1% and $903.5 million of unsecured indebtedness with a weighted average interest rate of 6.8%. We do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. For a further discussion of our liquidity needs, see “Current and Future Cash Needs.”

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The following table sets forth the principal payments due on our mortgages and notes payable as of September 30, 2003 ($ in thousands):

	Total		Within 1 year			Within 2 years		Within 3 years		Within 4 years		Within 5 years		Thereafter
Fixed Rate Debt:
Unsecured:
Put Option Notes (1)	$	100,000	$	—		$	—	$	—	$	—	$	—	$	100,000
Notes		706,500		246,500	(2)		—		—		110,000		100,000		250,000
Secured:
Mortgages and loans payable		631,203		12,676			79,776		14,933		79,767		11,393		432,658
Total Fixed Rate Debt		1,437,703		259,176			79,776		14,933		189,767		111,393		782,658
Variable Rate Debt:
Unsecured:
Term Loan		20,000		—			20,000		—		—		—		—
Revolving Loan		77,000		—			—		77,000		—		—		—
Secured:
Mortgage loan payable		68,780		240			275		64,964		3,301		—		—
Total Variable Rate Debt		165,780		240			20,275		141,964		3,301		—		—
Total Long Term Debt	$	1,603,483	$	259,416		$	100,051	$	156,897	$	193,068	$	111,393	$	782,658

(1) On June 24, 1997, a trust formed by the Operating Partnership sold $100.0 million of Exercisable Put Option Securities due June 15, 2004 (“X-POS”), which represent fractional undivided beneficial interests in the trust. The assets of the trust consist of, among other things, $100.0 million of Exercisable Put Option Notes due June 15, 2011 (the “Put Option Notes”), issued by the Operating Partnership. The Put Option Notes bear an interest rate of 7.19% from the date of issuance through June 15, 2004. After June 15, 2004, the interest rate to maturity on the Put Option Notes will be 6.39% plus the applicable spread determined as of June 15, 2004. In connection with the initial issuance of the Put Option Notes, a counter party was granted an option to purchase the Put Option Notes from the trust on June 15, 2004 at 100.0% of the principal amount. If the counter party elects not to exercise this option, the Operating Partnership would be required to repurchase the Put Option Notes from the Trust on June 15, 2004 at 100.0% of the principal amount plus accrued and unpaid interest.

(2) On December 1, 2003, $146.5 million of our 8.0% Notes and $100.0 million of our 6.75% Notes will mature. See “Current and Future Cash Needs” for further discussion on the refinancing of these Notes.

The mortgage and loans payable and the secured revolving loan were secured by real estate assets with an aggregate carrying value of approximately $1.2 billion at September 30, 2003.

On February 2, 1998, the Operating Partnership sold $125.0 million of MandatOry Par Put Remarketed Securities (“MOPPRS”) due February 1, 2013. The MOPPRS bore an interest rate of 6.835% from the date of issuance through January 31, 2003. On January 31, 2003, the interest rate was changed to 8.975% pursuant to the interest rate reset provisions of the MOPPRS. On February 3, 2003, the Operating Partnership repurchased 100.0% of the principal amount of the MOPPRS from the sole holder thereof in exchange for a secured note in the principal amount of $142.8 million. The secured note bears interest at a fixed rate of 6.03% and has a maturity date of February 28, 2013.

The Operating Partnership’s unsecured notes of $806.5 million bear fixed interest rates ranging from 6.75% to 8.125%, with interest payable semi-annually in arrears. Any premium and discount related to the issuance of the unsecured notes is being amortized over the life of the respective notes as an adjustment to interest expense. All of the unsecured notes, except for the Put Option Notes, are redeemable at any time prior to maturity at our option, subject to certain conditions including the payment of make-whole amounts.

On July 17, 2003, we amended and restated our existing revolving loan. The amended and restated $250.0 million revolving loan (the “Revolving Loan”) is from a group of ten lender banks, matures in July 2006 and replaces our previous $300.0 million revolving loan. The Revolving Loan carries an interest rate based upon our senior unsecured credit ratings. As a result, interest would currently accrue on borrowings under the Revolving Loan at an average rate of LIBOR plus 105 basis points. The terms of the Revolving Loan require us to pay an annual facility fee equal to .25% of the aggregate amount of the Revolving Loan. We currently have a credit rating of BBB-

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assigned by Standard & Poor’s and Fitch Inc. In August 2003, Moody’s Investor Service downgraded our assigned credit rating from Baa3 to Ba1. We cannot provide any assurances Moody’s or the other rating agencies will not further change our credit ratings. If our credit ratings by two or more rating agencies are lowered, the interest rate on borrowings under our revolving loan would be automatically increased.

The terms of the revolving loan and the indenture that governs our outstanding notes require us to comply with certain operating and financial covenants and performance ratios. We are currently in compliance with all such requirements. Although we expect to remain in compliance with the covenants and ratios under our revolving loans for at least the next several quarters, depending upon our future operating performance, we cannot assure you that we will continue to be in compliance.

The following table sets forth more detailed information about our ratio and covenant compliance under the Revolving Loan. Certain of these definitions may differ from similar terms used in the consolidated financial statements and may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the covenants in our revolving loan, including definitions of certain relevant terms, see the credit agreement governing our revolving loan which is included as an exhibit to our Quarterly Report for the period ended June 30, 2003 as Exhibit 10.

	September 30, 2003
Total Liabilities Less Than or Equal to 57.5% of Total Assets		53.6	%
Unencumbered Assets Greater Than or Equal to 2 times Unsecured Debt		2.12
Secured Debt Less Than or Equal to 35% of Total Assets		24.3	%
Adjusted EBITDA Greater Than 2.10 times Interest Expense		2.19
Adjusted EBITDA Greater Than 1.55 times Fixed Charges		1.63
Adjusted NOI Unencumbered Assets Greater Than 2.25 times Interest on Unsecured Debt		2.58
Tangible Net Worth Greater Than $1.573 Billion	$	1.673	billion
Restricted Payments, Including Distributions to Shareholders, Less Than or Equal to 95% of CAD		53.3	%

The following table sets forth more detailed information about the Operating Partnership’s ratio and covenant compliance under the Operating Partnership’s indenture as of September 30, 2003. Certain of these definitions may differ from similar terms used in the consolidated financial statements and may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the covenants in our indenture, including definitions of certain relevant terms, see the indenture governing our unsecured notes which is incorporated by reference in our 2002 Annual Report as Exhibit 4.2.

	September 30, 2003
Overall Debt Less Than or Equal to 60% of Adjusted Total Assets	41.5	%
Secured Debt Less Than or Equal to 40% of Adjusted Total Assets	18.1	%
Income Available for debt service Greater Than 1.50 times Annual Service Charge	2.7
Total Unencumbered Assets Greater Than 200% of Unsecured Debt	295.5	%

Current and Future Cash Needs. Historically, rental revenue has been the principal source of funds to meet our short-term liquidity requirements, which primarily consist of operating expenses, debt service, unitholder distributions, any guarantee obligations and ordinary capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. We presently have no plans for major capital improvements to the existing properties except for the $9.9 million in general and non-recurring renovations at certain properties. In addition, we could incur tenant improvements and lease commissions related to any releasing of space previously leased by WorldCom and US Airways.

On December 1, 2003, $146.5 million of our 8.0% Notes and $100.0 million of our 6.75% Notes will mature. A portion of this debt totaling $127.5 million is expected to be refinanced with 10-year secured debt at an effective rate of 5.25%. We also plan to enter into a $100.0 million two-year unsecured term loan with a floating rate that will initially be set at 1.3% over LIBOR. The remaining $19.0 million is expected to be re-paid with proceeds from asset sales or with funds from our $250.0 million senior credit facility.

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Although the 10-year secured loan and the two-year unsecured loan have been approved by the lending institutions, they are each subject to definitive documentation. Assuming we are successful in obtaining financing on the terms described above, we anticipate annual interest savings of approximately $8.9 million, or $0.15 per unit.

In addition to the requirements discussed above, our short-term (within the next 12 months) liquidity requirements also include the funding of our existing development activity, selective asset acquisitions and first generation tenant improvements and lease commissions on properties placed in-service that are not fully leased. We expect to fund our short-term liquidity requirements through a combination of working capital, cash flows from operations and the following:

• borrowings under our unsecured revolving loan (up to $154.7 million of availability as of October 17, 2003);

• the selective disposition of non-core assets or other assets the sale of which can generate attractive returns;

• the sale or contribution of some of our wholly-owned properties, development projects and development land to strategic joint ventures to be formed with unrelated investors, which will have the net effect of generating additional capital through such sale or contributions; and

• the issuance of secured debt (at September 30, 2003, we had $2.5 billion of unencumbered real estate assets at cost).

Our long-term liquidity needs generally include the funding of existing and future development activity, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under the Revolving Loans and long-term unsecured debt. We remain committed to maintaining a flexible capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of (1) the issuance by the Operating Partnership of additional unsecured debt securities, (2) the issuance of additional equity securities by the Company and the Operating Partnership as well as (3) the sources described above with respect to our short-term liquidity. We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayment of borrowings under the unsecured revolving loan. We do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities.

We anticipate that our available cash and cash equivalents and cash flows from operating activities, with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, our ability to make the expected distributions to unitholders and satisfy other cash payments may be adversely affected.

Commitments and Contingencies. In connection with the disposition of 225,000 square feet of property, fully leased to Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., we agreed to guarantee any rent shortfalls and re-tenanting costs for a five year period of time from the date of sale. Our contingent liability with respect to such guarantee as of September 30, 2003 is $17.5 million. Because of this guarantee, in accordance with GAAP, we have deferred the gain of approximately $6.9 million, which will be recognized when the contingency period is concluded.

In connection with the disposition of 298,000 square feet of property, fully leased to Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., we agreed to guarantee, over various contingency periods through April 2006, any rent shortfalls on certain space. Our contingent liability with respect to such guarantee as of September 30, 2003 is $4.4 million. Because of this guarantee, in accordance with GAAP, we have deferred $4.4 million of the total $8.4 million gain. The deferred portion of the gain will be recognized when each contingency period is concluded.

Joint Ventures. During the past several years, in order to generate additional capital, we have formed various joint ventures with unrelated investors. We have retained minority equity interests ranging from 20.00% to 50.00% in these joint ventures. As required by GAAP, we have accounted for our joint venture activity using the equity method of accounting, as we do not control these joint ventures. As a result, the assets and liabilities of our joint ventures are not included on our balance sheet and the results of operations of the ventures are not included on our income statement, other than as equity in earnings of unconsolidated affiliates.

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In connection with several of our joint venture partners with unaffiliated parties, we have agreed to guarantee certain rent shortfalls and re-tenanting costs for certain properties contributed or sold to the joint ventures. As of September 30, 2003, we have $12.9 million accrued for obligations related to these agreements. We believe that our estimates related to these agreements are adequate. However, if our assumptions and estimates prove to be incorrect, future losses may occur.

Certain properties owned in joint ventures with unaffiliated parties have buy/sell options that may be exercised to acquire the other partner’s interest by either us or our joint venture partner if certain conditions are met as set forth in the respective joint venture agreement. Our partner in SF-HIW Harborview, LP has the right to put its 80.0% equity interest in the partnership to us in cash at anytime during the one-year period commencing on September 11, 2014. The value of the equity interest will be determined based upon the then fair market value of SF-HIW Harborview, LP assets and liabilities.

The following discussion provides additional information regarding significant transactions with our joint ventures.

On July 29, 2003, we acquired the assets and/or our partner’s 80.0% equity interests related to 15 properties encompassing 1.3 million square feet owned by MG-HIW, LLC. The properties are located in Atlanta, the Research Triangle and Tampa. At the closing of the transaction, we paid our partner, Miller Global, $28.1 million, repaid $41.4 million of debt related to the properties and assumed $64.7 million of debt. The transaction implies a valuation (100.0% ownership) for the assets of $138.3 million and other net assets of approximately $2.9 million.

In December 2000, we guaranteed our 80.0% partner in MG-HIW, LLC joint venture, a minimum internal rate of return on $50.0 million of their equity investment in the remaining assets of the joint venture (the “Orlando assets”). On July 29, 2003, we entered into an option agreement to acquire Miller Global’s 80.0% interest in the Orlando assets for between $62.5 and $65.2 million depending on the closing date and the distributions from the joint venture prior to closing. Based on the terms of the agreement, the purchase option price range satisfies the internal rate of return guarantee. In connection with the option agreement, we entered into a letter of credit in the amount of $7.5 million in favor of Miller Global, which can be drawn by Miller Global in the event we do not exercise our option to purchase their 80.0% interest in the remaining assets of MG-HIW, LLC by March 24, 2004.

As part of the MG-HIW, LLC acquisition on July 29, 2003, we entered into an option agreement with our partner, Miller Global, to acquire their 50.0% interest in the remaining assets encompassing 87,832 square feet of property of MG-HIW Metrowest I, LLC and MG-HIW Metrowest II, LLC for $3.2 million. The $7.4 million construction loan to fund the development of this property, of which $6.3 million is outstanding at September 30, 2003, will be either paid in full or assumed by us in connection with the acquisition of the remaining assets.

Also as a part of the MG-HIW, LLC acquisition on July 29, 2003, we were assigned Miller Global’s 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC. The construction loan, which was made to this joint venture by an affiliate of the Company had an interest rate of LIBOR plus 200 basis points and was paid in full on July 29, 2003 in connection with the assignment.

In connection with the Des Moines joint venture guarantees in place prior to January 1, 2003, the maximum potential amount of future payments we could be required to make under the guarantee is $25.7 million. Of this amount, $8.6 million arose from housing revenue bonds that require credit enhancements in addition to the real estate mortgages. The bonds bear a floating interest rate, which currently averages 1.0% and mature in 2015. Guarantees of $9.6 million will expire upon two industrial buildings becoming 93.8% and 95.0% leased. Currently, these buildings are 84.0% and 63.0% leased, respectively. The remaining $7.5 million in guarantees relate to loans on four office buildings that were in the lease-up phase at the time the loans were initiated. Each of the loans will expire by May 2008. The average occupancy of the four buildings at September 30, 2003 is 91.0%. If the joint ventures are unable to repay the outstanding balance under the loans, we will be required, under the terms of the agreements, to repay the outstanding balance. Recourse provisions exist to enable us to recover some or all of our losses from the joint ventures’ assets and/or the other partner. The joint ventures currently generate sufficient cash flow to cover the debt service required by the loans.

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In connection with the RRHWoods, LLC joint venture, we renewed our guarantee of $6.2 million to a bank in July 2003. The bank provides a letter of credit securing industrial revenue bonds, which mature in 2015. We would be required to perform under the guarantee should the joint venture be unable to repay the bonds. We have recourse provisions in order to recover from the joint venture’s assets and the other partner for amounts paid in excess of our proportionate share. The property collateralizing the bonds is 100.0% leased and currently generates sufficient cash flow to cover the debt service required by the bond financing.

With respect to the Plaza Colonnade, LLC joint venture, we have included $2.8 million in other liabilities and adjusted the investment in unconsolidated affiliates by $2.8 million on our consolidated balance sheet at September 30, 2003 related to two separate guarantees of a construction loan agreement and a construction completion agreement. The construction loan matures in February 2006, with two one-year options to extend the maturity date that are conditional on completion and lease-up of the project. The term of the construction completion agreement requires the core and shell of the building to be completed by December 15, 2005. Both guarantees arose from the formation of the joint venture to construct an office building. If the joint venture is unable to repay the outstanding balance under the construction loan agreement or complete the construction of the office building, we would be required, under the terms of the agreements, to repay our 50.0% share of the outstanding balance under the construction loan and complete the construction of the office building. The maximum potential amount of future payments by us under these agreements is $34.9 million. No recourse provisions exist that would enable us to recover from the other partner amounts paid under the guarantee. However, given that the loan is collateralized by the building, we and our partner could obtain and liquidate the building to recover the amounts paid should they be required to perform under the guarantee.

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The following table sets forth information regarding our joint venture activity as recorded on the respective joint venture’s books at September 30, 2003 and December 31, 2002 ($ in thousands):

			September 30, 2003						December 31, 2002
	Percent Owned		Total Assets		Debt		Total Liabilities		Total Assets		Debt		Total Liabilities
Balance Sheet Data:
Board of Trade Investment Company	49.00	%	$	8,083	$	792	$	1,141	$	7,778	$	919	$	1,071
Dallas County Partners (1)	50.00	%		41,873		38,234		40,606		44,128		38,904		41,285
Dallas County Partners II (1)	50.00	%		18,085		22,756		23,786		18,900		23,587		24,874
Fountain Three (1)	50.00	%		34,368		30,191		32,058		37,159		30,958		32,581
RRHWoods, LLC (1)	50.00	%		80,975		66,499		69,478		82,646		68,561		71,767
Highwoods DLF 98/29, LP	22.81	%		140,708		67,489		69,881		141,147		68,209		70,482
Highwoods DLF 97/26 DLF 99/32, LP	42.93	%		116,637		59,197		61,702		119,134		59,688		62,601
Highwoods-Markel Associates, LLC	50.00	%		15,625		11,588		12,023		16,026		11,625		12,583
MG-HIW, LLC	20.00	%		198,018		136,207		142,144		355,102		242,240		249,340
MG-HIW Peachtree Corners III, LLC	50.00	%		—		—		—		3,809		2,494		2,823
MG-HIW Metrowest I, LLC	50.00	%		1,601		—		22		1,601		—		3
MG-HIW Metrowest II, LLC	50.00	%		10,329		6,257		6,529		9,600		5,372		5,540
Concourse Center Associates, LLC	50.00	%		14,560		9,737		10,025		14,896		9,859		10,193
Plaza Colonnade, LLC	50.00	%		19,226		9,936		10,577		3,591		—		3
SF-HIW Harborview, LP	20.00	%		40,586		22,800		24,681		41,134		22,800		25,225
Total			$	740,674	$	481,683	$	504,653	$	896,651	$	585,216	$	610,371

The following table sets forth information regarding our joint venture activity as recorded on the respective joint venture’s books during the nine months ended September 30, 2003 and 2002 ($ in thousands):

			September 30, 2003											September 30, 2002
	Percent Owned		Revenue		Operating Expenses		Interest		Depr/ Amort		Net Income/ (Loss)			Revenue		Operating Expenses		Interest		Depr/ Amort		Net Income/ (Loss)
Income Statement Data:
Board of Trade Investment Company	49.00	%	$	1,768	$	1,191	$	50	$	304	$	223		$	2,012	$	1,216	$	64	$	251	$	481
Dallas County Partners (1)	50.00	%		7,954		4,135		2,079		1,415		325			8,389		4,102		1,976		1,470		841
Dallas County Partners II (1)	50.00	%		4,579		1,914		1,775		617		273			4,453		1,897		1,856		796		(96	)
Fountain Three (1)	50.00	%		5,174		2,346		1,687		1,160		(19	)		4,999		2,043		1,525		983		448
RRHWoods, LLC (1)	50.00	%		10,918		5,551		1,979		2,545		843			10,285		5,257		2,755		2,684		(411	)
Highwoods DLF 98/29, LP	22.81	%		14,492		4,142		3,448		2,592		4,310			15,456		4,123		3,496		2,538		5,299
HIghwoods DLF 97/26 DLF 99/32, LP	42.93	%		12,082		3,345		3,448		2,979		2,310			12,658		3,272		3,479		2,972		2,935
Highwoods-Markel Associates, LLC	50.00	%		2,462		1,300		800		464		(102	)		2,382		1,243		725		419		(5	)
MG-HIW, LLC	20.00	%		32,862		12,254		6,202		6,295		8,111	(2)		38,347		13,375		8,098		6,160		10,714
MG-HIW Peachtree Corners III, LLC	50.00	%		219		75		73		76		(5	)		—		29		—		28		(57	)
MG-HIW Rocky Point, LLC	50.00	%(3)		—		—		—		—		—			1,800		555		271		248		726
MG-HIW Metrowest I, LLC	50.00	%		—		26		—		—		(26	)		—		19		—		—		(19	)
MG-HIW Metrowest II, LLC	50.00	%		441		325		124		252		(260	)		204		176		20		181		(173	)
Concourse Center Associates, LLC	50.00	%		1,556		401		518		227		410			1,586		401		508		227		450
Plaza Colonnade, LLC	50.00	%		10		2		—		3		5			5		—		—		1		4
SF-HIW Harborview, LP	20.00	%(3)		4,208		1,288		1,052		650		1,218			271		74		79		72		46
Total			$	98,725	$	38,295	$	23,235	$	19,579	$	17,616		$	102,847	$	37,782	$	24,852	$	19,030	$	21,183

(1) Des Moines joint ventures.

(2) Net income excludes a $12.1 million impairment charge at the joint venture level of which our share is $2.4 million. (See Note 3 to the Consolidated Financial Statements for further discussion). With the impairment charge, the joint venture had a net loss of $4.0 million.

(3) On June 26, 2002, we acquired our joint venture partner’s interest in MG-HIW Rocky Point, LLC, which owned Harborview Plaza, a 205,000 rentable square foot office property. On September 11, 2002, we contributed Harborview Plaza to SF-HIW Harborview, LP, a newly formed joint venture with a different partner, in exchange for a 20.0% limited partnership interest and $12.1 million in cash.

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As of September 30, 2003, our joint ventures had approximately $481.7 million of outstanding debt and the following table sets forth the principal payments due on that outstanding long-term debt as recorded on the respective joint venture’s books at September 30, 2003 ($ in thousands):

	Percent Owned		Total			Within 1 year		Within 2 years		Within 3 years		Within 4 years		Within 5 years		Thereafter
Board of Trade Investment Company	49.00	%	$	792		$	180	$	195	$	210	$	207	$	—	$	—
Dallas County Partners (1)	50.00	%		38,234			951		1,022		4,432		8,829		7,695		15,305
Dallas County Partners II (1)	50.00	%		22,756			1,211		1,340		1,483		1,642		1,817		15,263
Fountain Three (1)	50.00	%		30,191			1,090		1,156		1,224		1,298		6,600		18,823
RRHWoods, LLC (1)	50.00	%		66,499			366		397		424		4,259		375		60,678
Highwoods DLF 98/29, LP	22.81	%		67,489			1,018		1,089		1,165		1,246		1,334		61,637
Highwoods DLF 97/26 DLF 99/32, LP	42.93	%		59,197			700		756		815		880		950		55,096
Highwoods-Markel Associates, LLC	50.00	%		11,588			98		109		118		128		135		11,000
MG-HIW, LLC	20.00	%		136,207			—		—		136,207		—		—		—
MG-HIW Metrowest II, LLC	50.00	%		6,257			—		6,257		—		—		—		—
Concourse Center Associates, LLC	50.00	%		9,737			173		185		199		213		229		8,738
Plaza Colonnade, LLC	50.00	%		9,936			—		—		—		9,936		—		—
SF-HIW Harborview, LP	20.00	%		22,800			—		—		—		—		372		22,428
Total			$	481,683	(2)	$	5,787	$	12,506	$	146,277	$	28,638	$	19,507	$	268,968

(1) Des Moines joint ventures.

(2) All of this joint venture debt is non-recourse to us except in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and material misrepresentations and those guarantees and loans described in “Joint Ventures” above.

Interest Rate Hedging Activities. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our revolving loan bears interest at variable rates. Our long-term debt, which consists of long-term financings and the unsecured issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments.

The following table sets forth information regarding our interest rate hedge contracts as of September 30, 2003 ($ in thousands):

Type of Hedge	Notional Amount		Maturity Date	Reference Rate	Fixed Rate		Fair Market Value
Interest Rate Swap	$	20,000	1/2/2004	1 month USD-LIBOR-BBA	0.990	%	$	4
Interest Rate Swap	$	20,000	6/1/2005	1 month USD-LIBOR-BBA	1.590	%	$	(6	)
							$	(2	)

The interest rate on all of our variable rate debt is adjusted at one to three month intervals, subject to settlements under these contracts. We also enter into treasury lock agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings. During the nine months ended September 30, 2003, $3.9 million was received from counterparties under interest rate hedge contracts.

Share and Unit Repurchases. During the quarter ended September 30, 2003, the Company repurchased a total of 104,535 Common Units at a weighted average price of $22.80 per unit. The Company has 5.1 million shares/units remaining under its previously announced share repurchase programs.

WorldCom and US Air Bankruptcies. On July 21, 2002, WorldCom filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States Bankruptcy Code. As of December 31, 2002, WorldCom rejected two leases encompassing 819,653 square feet with annualized revenue of approximately $14.9 million. In addition, effective May 1, 2003, WorldCom rejected an additional lease encompassing 21,806 square feet with annualized revenue of approximately $311,000.

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We have filed claims in connection with the rejected leases in the amount of $21.5 million. Because claims will be subject to WorldCom’s approved plan of reorganization and the availability of funds to pay creditors, we expect actual amounts to be received in satisfaction of these claims to be less than the full amount of the claims.

On August 11, 2002, US Airways filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States Bankruptcy Code. We entered into an agreement with US Airways that was approved by the United States Bankruptcy Court on February 21, 2003, whereby they will continue to lease 293,007 square feet. Additionally, we have agreed to a $600,000 reduction in annual rent on one lease, encompassing 81,220 square feet and expiring on December 31, 2007, for the remaining term of the lease.

We cannot provide any assurance that we will be able to re-lease rejected space quickly or on as favorable terms.

Impact of Recently Issued Accounting Standards

In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”), which rescinds Statement No. 4, which required all gains and losses from the extinguishment of debt to be aggregated, and if material, classified as an extraordinary item, net of related income tax effect. The provisions of SFAS 145 related to the rescission of Statement No. 4 are effective for financial statements issued for fiscal years beginning after May 15, 2002. The statement also requires gains and losses from the extinguishment of debt classified as an extraordinary item in prior periods presented that do not meet the criteria in Accounting Principles Board (“APB”) Opinion 30 for classification as an extraordinary item to also be reclassified. We adopted SFAS 145 in the first quarter of 2003. In accordance with the statement, we reclassified losses from the extinguishment of debt of $378,000 recorded as an extraordinary item to interest expense in its Consolidated Statements of Income for the three and nine months ended September 30, 2002.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which changes the accounting for, and disclosure of, certain guarantees. Beginning with transactions entered into after December 31, 2002, certain guarantees are to be recorded at fair value, which is different from prior practice, under which a liability was recorded only when a loss was probable and could be reasonably estimated. In general, the change applies to contracts or indemnification agreements that contingently require us to make payments to a guaranteed third-party based on changes in an underlying asset, liability, or equity security of the guaranteed party. However, a guarantee or an indemnification whose existence prevents the guarantor from being able to either account for a transaction as the sale of an asset that is related to the guarantee’s underlying or recognize in earnings the profit from that sale transaction is exempt from the interpretation. The disclosure requirements in this Interpretation are effective for interim and annual periods ending after December 15, 2002. As of September 30, 2003, we had various guarantees in effect as further discussed in Note 10 to the Consolidated Financial Statements.

In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”), which amends FASB No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements related to the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. On January 1, 2003, we adopted the fair value recognition provision prospectively for all awards granted after January 1, 2003. Under this provision, total compensation expense related to stock options is determined using the fair value of the stock options on the date of grant and is recognized on a straight-line basis over the option vesting period. Prior to 2003, we accounted for stock options under this plan under the guidance of APB Opinion 25, “Accounting for Stock Issued to Employees and Related Interpretations.” (See Note 11 to the Consolidated Financial Statements for further discussion.)

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“VIEs”), the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights and to determine when and which business enterprise

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should consolidate the VIEs. This new model applies when either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional financial support. In addition, FIN 46 requires additional disclosures. FIN 46 is currently in effect for our interests in VIEs acquired subsequent to January 31, 2003. As a result of FASB Staff Position FIN 46-6, we are deferring the application of FIN 46 for interests in VIEs or potential VIEs owned at January 31, 2003 until the amended effective date of December 31, 2003 in anticipation of additional guidance to be provided by the FASB. We currently have 15 joint ventures with unrelated investors in which application of FIN 46 will be deferred. We have retained minority equity interests in these joint ventures ranging from 20.00% to 50.00%. These joint ventures were formed for the development, management and leasing of office, industrial and retail properties. (See Note 2 to the Consolidated Financial Statements for further discussion.) FIN 46 requires us to disclose our maximum exposure to loss as a result of our involvement with these entities, which would be $101.1 million assuming we would be required to fully satisfy our debt guarantees and experience a complete loss of our equity investment in such entities. Transactions between us and these entities resulted in a total of $3.2 million of management, development and commission fee income to us for the nine months ended September 30, 2003 and 2002.

In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, with some exceptions, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of SFAS No. 149 do not have a material impact on our financial condition and results of operations.

In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of this Statement and still existing at the beginning of the interim period of adoption. As of September 30, 2003, the provisions of SFAS 150 do not have a material impact on our financial condition or results of operations. However, we believe the implementation of FIN 46 at December 31, 2003, as mentioned above, may result in minority interest in VIEs, which is classified as non-controlling interests in finite-life entities under SFAS 150. At its October 29, 2003 meeting, the FASB voted to defer indefinitely SFAS 150 as it relates to non-controlling interests in finite-life entities.

Funds From Operations and Cash Available for Distributions

We consider funds from operations (“FFO”) and cash available for distributions (“CAD”) to be useful financial performance measures of the operating performance of an equity REIT. Together with net income and cash flows from operating, investing and financing activities, FFO and CAD provide an additional basis to evaluate the ability of a REIT to incur and service debt, fund acquisitions and other capital expenditures and pay distributions. FFO and CAD do not represent net income or cash flows from operating, investing or financing activities as defined by GAAP. They should not be considered as alternatives to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO and CAD do not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to unitholders. Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO, as described below.

Our calculation of FFO, which is consistent with the calculation of FFO as defined by the National Association of Real Estate Investment Trusts (NAREIT), is as follows:

• Net income (loss)—computed in accordance with GAAP;

• Plus depreciation and amortization of assets uniquely significant to the real estate industry;

• Less gains (or plus losses) from sales of depreciable operating properties, and items that are classified as extraordinary items under GAAP;

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• Plus minority interest;

• Less dividends to preferred unitholders;

• Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis); and

• Plus or minus adjustments for depreciation and amortization, and gain/(loss) on sale related to discontinued operations.

CAD is defined as FFO reduced by non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. In addition, CAD includes both recurring and nonrecurring operating results. As a result, nonrecurring items that are not defined as “extraordinary” under GAAP are reflected in the calculation of CAD. In addition, nonrecurring items included in the calculation of CAD for periods ended after March 28, 2003 meet the requirements of Item 10(e) of Regulation S-K, as amended January 22, 2003.

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FFO and CAD for the three and nine months ended September 30, 2003 and 2002 are summarized in the following table ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Funds from operations:
Net income	$	23,637		$	17,329		$	48,347		$	80,375
Add/(Deduct):
Depreciation and amortization		31,536			29,871			95,752			86,992
Gain/(loss) on disposition of depreciable assets		203	(1)		(171	)(1)		(37	)(1)		(14,618	)(1)
Distributions to preferred unitholders		(7,713	)		(7,713	)		(23,139	)		(23,139	)
Unconsolidated affiliates:
Depreciation and amortization		2,124			2,317			6,830			6,747
Discontinued operations (3):
Depreciation and amortization		372			2,946			2,216			8,746
Gain on sale		(12,113	)(1)		(13	)(1)		(13,628	)(1)		(2,977	)(1)
Funds from operations		38,046			44,566	(2)		116,341			142,126	(2)
Cash available for distribution:
Add/(Deduct):
Rental income from straight-line rents		(1,136	)		(1,222	)		(4,501	)		(2,540	)
Amortization of intangible lease assets		212			—			212			—
Impairment charges		—			3,729			2,738			13,625
Amortization of deferred financing costs		819			347			2,202			1,027
Nonrecurring compensation and management fee expense		—			—			—			3,700
Litigation reserve		—			2,700			—			2,700
Non-incremental revenue generating capital expenditures:
Building improvements paid		(4,500	)		(1,740	)		(10,025	)		(4,861	)
Second generation tenant improvements paid		(6,588	)		(5,824	)		(18,008	)		(12,735	)
Second generation lease commissions paid		(4,551	)		(3,694	)		(11,465	)		(9,353	)
		(15,639	)		(11,258	)		(39,498	)		(26,949	)
Cash available for distribution	$	22,302		$	38,862		$	77,494		$	133,689
Per common unit-diluted:
Funds from operations	$	0.64		$	0.74		$	1.95		$	2.34
Distributions paid	$	0.425		$	0.585		$	1.435		$	1.755
Distribution payout ratios:
Funds from operations		66.4	%		79.4	%		73.6	%		74.9	%
Cash available for distribution		113.2	%		91.0	%		110.5	%		79.7	%
Weighted average units outstanding - diluted		59,422			60,461			59,654			60,694
Net cash provided by/(used in):
Operating activities	$	55,641		$	82,381		$	130,032		$	174,090
Investing activities		(10,835	)		18,525			(31,283	)		75,766
Financing activities		(44,952	)		(100,949	)		(96,796	)		(236,836	)
Net (decrease)/ increase in cash and cash equivalents	$	(146	)	$	(43	)	$	1,953		$	13,020

In October 2003, NAREIT issued a Financial Reporting Alert that changed its current implementation guidance for FFO regarding impairment charges. Accordingly, impairment charges have been excluded from gain/(loss) on disposition of depreciable assets in the calculation of FFO. In addition, as a result of the FASB’s “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”), losses on the extinguishment of debt will no longer be classified as an extraordinary item in the Operating Partnership’s Consolidated Statements of Income. Therefore, the calculation of FFO no longer includes an add-back of this amount. See page 2 of this table for a reconciliation of gains/(losses) to the Operating Partnership’s Consolidated Statements of Income and the impact these changes have had on FFO, in dollars and per unit amounts, for all periods presented.

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(1) The following is a reconciliation of gain/(loss) on disposition of depreciable assets included in the FFO calculation and gain/(loss) on disposition of depreciable assets included in the Operating Partnership’s Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Continuing Operations:
Gain/(loss) on disposition of depreciable assets per FFO calculation	$	(203	)	$	171		$	37		$	14,618
Impairment charges		—			(500	)		—			(9,568	)
Gain/(loss) on disposition of depreciable assets per Consolidated Statements of Income	$	(203	)	$	(329	)	$	37		$	5,050
Discontinued Operations:
Gain/(loss) on disposition of depreciable assets per FFO calculation	$	12,113		$	13		$	13,628		$	2,977
Impairment charges		—			(3,229	)		(325	)		(4,057	)
Gain/(loss) on disposition of depreciable assets per Consolidated Statements of Income	$	12,113		$	(3,216	)	$	13,303		$	(1,080	)

In addition to the impairment charges detailed above, FFO for the nine months ended September 30, 2003 also excludes a $2.4 million impairment charge included in the Operating Partnership’s equity in earnings of unconsolidated affiliates related to the acquisition of certain assets of the MG-HIW, LLC joint venture by the Operating Partnership.

(2) FFO for the three and nine months ended September 30, 2002 was decreased by $687,000, which represents a loss on the extinguishment of debt incurred during those periods. There were no losses on the extinguishment of debt incurred in 2003.

As a result of the changes to the FFO calculation as outlined in footnotes (1) and (2), FFO has been reduced by the following in dollars and per unit amounts:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2002		2003		2002
FFO in dollars	$	—	$	4,416	$	2,738	$	14,312
FFO per unit	$	—	$	0.07	$	0.05	$	0.24

(3) For further discussion related to discontinued operations, see Note 7 to the Consolidated Financial Statements.

Inflation

In the last five years, inflation has not had a significant impact on us because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the customers to pay their share of increases in operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to inflation.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented.

To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our revolving loan bears interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes.

Certain Variable Rate Debt. As of September 30, 2003, we had approximately $145.8 million of variable rate debt outstanding that was not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt is 100 basis points higher or lower during the 12 months ending September 30, 2004, our interest expense would be increased or decreased approximately $1.5 million.

Interest Rate Hedge Contracts. For a discussion of our interest rate hedge contracts in effect at September 30, 2003, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Interest Rate Hedging Activities.” If interest rates increase by 100 basis points, the aggregate fair market value of these interest rate hedging contracts as of September 30, 2003 would increase by approximately $321,244. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of September 30, 2003 would decrease by approximately $334,332.

In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contract.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure. SEC rules require that we disclose the conclusions of our CEO and CFO about the effectiveness of our disclosure controls and procedures.

The CEO/CFO evaluation of our disclosure controls and procedures included a review of the controls’ objectives and design, the controls’ implementation by the Company and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. Our disclosure controls and procedures are also evaluated on an ongoing basis by the following:

• employees in the Company’s internal audit department;

• other personnel in the Company’s finance organization;

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• members of the Company’s internal disclosure committee; and

• members of the audit committee of the Company’s Board of Directors.

Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our disclosure controls and procedures, or whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions,” which are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions.

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Operating Partnership have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Based on the most recent evaluation, as of the end of the period evaluated by the quarterly report, our CEO and CFO believe that our disclosure controls and procedures are effective to ensure that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our disclosure controls and procedures are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with GAAP.

Since the date of this most recent evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

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PART II - OTHER INFORMATION

Item 6. Exhibits and Reports On Form 8-K

(a) Exhibits

Exhibit No.	Description
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

(b) Reports on Form 8-K

None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HIGHWOODS REALTY LIMITED PARTNERSHIP
By:	Highwoods Properties Inc., its general partner
By:	/s/ RONALD P. GIBSON
	Ronald P. Gibson
	President and Chief Executive Officer
By:	/s/ CARMAN J. LIUZZO
	Carman J. Liuzzo
	Chief Financial Officer (Principal Accounting Officer)

Date: November 14, 2003

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