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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission file number: 000-21731
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Highwoods Realty Limited Partnership
(Exact name of registrant as specified in its charter)
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North Carolina 56-1864557
(State or other jurisdiction (I.R.S. EmployerIdentification Number)
ofincorporation or organization)
3100 Smoketree Court, Suite 600, Raleigh, N.C.
(Address of principal executive office)
27604
(Zip Code)
Registrant's telephone number, including area code:
(919) 872-4924
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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 [_]
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HIGHWOODS REALTY LIMITED PARTNERSHIP
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2001
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 3
Consolidated Balance Sheets as of March 31, 2001 and December
31, 2000....................................................... 4
Consolidated Statements of Income for the three months ended
March 31, 2001 and 2000........................................ 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001
and 2000...................................................... 6
Notes to Consolidated Financial Statements..................... 8
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations.......................................... 12
Results of Operations.......................................... 12
Liquidity and Capital Resources................................ 12
Recent Developments............................................ 14
Possible Environmental Liabilities............................. 15
Compliance with the Americans with Disabilities Act............ 16
Funds From Operations and Cash Available for Distributions..... 16
Disclosure Regarding Forward-Looking Statements................ 17
Property Information........................................... 19
Inflation...................................................... 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 29
Item 2. Changes in Securities and Use of Proceeds...................... 29
Item 6. Exhibits and Reports on Form 8-K............................... 29
2
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 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 2000 Annual Report on Form 10-K.
3
HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(dollars in thousands)
March 31, 2001 December 31, 2000
-------------- -----------------
(Unaudited)
ASSETS
Real estate assets, at cost:
Land and improvements........................ $ 392,974 $ 398,944
Buildings and tenant improvements............ 2,790,150 2,742,377
Development in process....................... 110,425 87,622
Land held for development.................... 147,503 144,727
Furniture, fixtures and equipment............ 11,736 11,433
---------- ----------
3,452,788 3,385,103
Less--accumulated depreciation............... (306,120) (280,609)
---------- ----------
Net real estate assets....................... 3,146,668 3,104,494
Property held for sale........................ 96,910 127,824
Cash and cash equivalents..................... 43,769 102,486
Restricted cash............................... 2,145 2,192
Accounts receivable, net...................... 18,212 23,841
Advances to related parties................... -- 27,560
Notes receivable.............................. 40,294 72,047
Accrued straight-line rents receivable........ 41,996 39,295
Investment in unconsolidated affiliates....... 73,288 72,951
Other assets:
Deferred leasing costs....................... 88,953 83,269
Deferred financing costs (see Note 4)........ 26,350 43,110
Prepaid expenses and other................... 11,076 11,857
---------- ----------
126,379 138,236
Less--accumulated amortization............... (48,585) (49,889)
---------- ----------
Other assets, net............................ 77,794 88,347
---------- ----------
Total Assets.................................. $3,541,076 $3,661,037
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and notes payable................... $1,572,208 $1,568,019
Accounts payable, accrued expenses and other
liabilities.................................. 99,774 104,342
---------- ----------
Total Liabilities............................ 1,671,982 1,672,361
Redeemable operating partnership units:
Class A Common Units outstanding, 7,465,748
at March 31, 2001 and 7,630,088 at December
31, 2000, respectively...................... 184,031 189,798
Class B Common Units outstanding, 196,492 at
March 31, 2001 and December 31, 2000........ 4,844 4,888
Series A Preferred Units outstanding,
125,000 at March 31, 2001 and December 31,
2000........................................ 121,809 121,809
Series B Preferred Units outstanding,
6,900,000 at March 31, 2001 and December
31, 2000.................................... 166,346 166,346
Series D Preferred Units outstanding,
400,000 at March 31, 2001 and December 31,
2000........................................ 96,842 96,842
Partners' Capital
Class A Common Units:
General partner Common Units outstanding,
612,160 at March 31, 2001 and 652,649 at
December 31, 2000, respectively............. 12,951 14,089
Limited partner Common Units outstanding,
53,138,092 at March 31, 2001 and 56,982,135
at December 31, 2000, respectively.......... 1,282,271 1,394,904
---------- ----------
Total Partners' Capital.................... 1,295,222 1,408,993
---------- ----------
$3,541,076 $3,661,037
========== ==========
See accompanying notes to consolidated financial statements.
4
HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands except per unit amounts)
Three Months Ended
March 31,
--------------------
2001 2000
--------- ---------
Revenue:
Rental property....................................... $ 128,226 $ 136,181
Equity in earnings of unconsolidated affiliates....... 744 827
Interest and other income............................. 6,754 3,274
--------- ---------
Total Revenue....................................... 135,724 140,282
Operating expenses:
Rental property....................................... 36,751 39,339
Depreciation and amortization......................... 29,125 28,271
Interest expense......................................
Contractual......................................... 26,944 26,158
Amortization of deferred financing costs............ 665 721
--------- ---------
27,609 26,879
General and administrative.............................. 4,914 4,965
--------- ---------
Income before gain on disposition of land and
depreciable assets and extraordinary item.............. 37,325 40,828
Gain on disposition of land and depreciable assets...... 7,071 6,946
--------- ---------
Income before extraordinary item........................ 44,396 47,774
Extraordinary item--loss on early extinguishment of
debt................................................. (193) (195)
--------- ---------
Net income............................................ 44,203 47,579
Distributions on preferred units........................ (8,145) (8,145)
--------- ---------
Net income available for Class A Common Units......... $ 36,058 $ 39,434
========= =========
Net income per Common Unit--basic:
Income before extraordinary item...................... $ 0.57 $ 0.57
Extraordinary item--loss on early extinguishment of
debt............................................... -- --
--------- ---------
Net income............................................ $ 0.57 $ 0.57
========= =========
Net income per Common Unit--diluted:
Income before extraordinary item...................... $ 0.56 $ 0.57
Extraordinary item--loss on early extinguishment of
debt............................................... -- --
--------- ---------
Net income............................................ $ 0.56 $ 0.57
========= =========
Weighted average Common Units outstanding--basic:
Class A Common Units:
General Partner..................................... 635 686
Limited Partners.................................... 62,774 67,884
Class B Common Units:
Limited Partners.................................... 196 196
--------- ---------
Total............................................. 63,605 68,766
========= =========
Weighted average Common Units outstanding--diluted:
Class A Common Units:
General Partner..................................... 637 687
Limited Partners.................................... 63,037 67,968
Class A Common Units:
Limited Partners.................................... 196 196
--------- ---------
Total............................................. 63,870 68,851
========= =========
See accompanying notes to consolidated financial statements.
5
HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Three Months Ended
March 31,
--------------------
2001 2000
--------- ---------
Operating activities:
Net income............................................... $ 44,203 $ 47,579
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 29,790 28,992
Equity in earnings of unconsolidated affiliates........ (744) (827)
Loss on early extinguishment of debt..................... 193 195
Gain on disposition of land and depreciable assets....... (7,071) (6,946)
Transition adjustment upon adoption of FASB 133.......... 556 --
Loss on ineffective portion of derivative instruments.... 466 --
Changes in operating assets and liabilities.............. (2,486) (9,078)
--------- ---------
Net cash provided by operating activities............ 64,907 59,915
--------- ---------
Investing activities:
Additions to real estate assets.......................... (57,752) (39,106)
Proceeds from disposition of real estate assets.......... 47,900 20,666
Repayment from advances to subsidiaries.................. 27,560 1,237
Distributions from unconsolidated affiliates............. 1,261 418
Investments in notes receivable.......................... 31,078 (531)
Other investing activities............................... (9,763) (20,335)
--------- ---------
Net cash provided by/(used in) investing activities.. 40,284 (37,651)
--------- ---------
Financing activities:
Distributions paid on Common Units....................... (36,506) (38,438)
Distributions paid on Preferred Units.................... (8,145) (8,145)
Payment of prepayment penalties.......................... (193) (195)
Borrowings on mortgages and notes payable................ 16,402 72,215
Repayment of mortgages and notes payable................. (33,733) (67,334)
Borrowings on revolving loans............................ 16,000 129,000
Repayment on revolving loans............................. (9,000) (85,000)
Net redemptions/proceeds of contributed capital.......... (1,725) 599
Repurchase of common units............................... (106,270) (35,301)
Net change in deferred financing costs................... (738) (418)
--------- ---------
Net cash used in financing activities................ (163,908) (33,017)
--------- ---------
Net decrease in cash and cash equivalents................ (58,717) (10,753)
Cash and cash equivalents at beginning of the period..... 102,486 33,915
--------- ---------
Cash and cash equivalents at end of the period........... $ 43,769 $ 23,162
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 23,109 $ 23,781
========= =========
See accompanying notes to consolidated financial statements.
6
HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Supplemental disclosure of non-cash investing and financing activities
The following table summarizes the net assets contributed by the holders of
Common Units in the Operating Partnership and the net assets acquired subject
to mortgage notes payable.
Three Months
Ended March
31,
---------------
2001 2000
------- ------
Assets:
Notes receivable............................................... $ 675 $ --
Cash and cash equivalents...................................... 551 --
Net real estate assets......................................... 19,881 1,356
Liabilities:
Mortgages and notes payable.................................... 22,520 --
Accounts payable, accrued expenses and other liabilities....... 1,392 --
------- ------
Net assets..................................................... $(2,805) $1,356
======= ======
See accompanying notes to consolidated financial statements.
7
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
1. BASIS OF PRESENTATION
The Operating Partnership is a subsidiary of the Company. At March 31, 2001,
the Company owned 88% of the Common Units in the Operating Partnership.
The consolidated financial statements include the accounts of 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's 125,000 Series A Preferred Units are senior to
the Class A and B 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 Class A and B 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 Class A and B 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 Class A Common Units are owned by the Company and by certain limited
partners of the Operating Partnership. The Class A Common Units owned by the
Company are classified as general partners' capital and limited partners'
capital. The Class B Common Units are owned by certain limited partners (not
the Company) and only differ from the Class A Common Units in that they are not
eligible for allocation of income and distributions. The Class B Common Units
will convert to Class A Common Units in 25% annual installments commencing one
year from the date of issuance. Prior to such conversion, such Class B Common
Units will not be redeemable for cash or shares of the Company's Common Stock.
Generally one year after issuance, the Operating Partnership is obligated to
redeem each of the Class A 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
Class A Common Units 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.
The extraordinary loss represents the write-off of loan origination fees and
prepayment penalties paid on the early extinguishment of debt.
Certain amounts in the March 31, 2000 financial statements have been
reclassified to conform to the March 31, 2001 presentation. These
reclassifications had no material effect on net income or partner's capital as
previously reported.
8
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. For further information, refer to
the financial statements and notes thereto included in our 2000 Annual Report
on Form 10-K.
2. SEGMENT INFORMATION
Our sole business is the acquisition, development and operation of rental
real estate properties. We operate office, industrial and retail properties and
apartment units. There are no material inter-segment transactions.
Our chief operating decision maker ("CDM") 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 CDM evaluates operating results and allocates resources on a property-by-
property basis within the various property types.
9
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accounting policies of the segments are the same as those described in
Note 1. Further, all operations are within the United States and no tenant
comprises more than 10% of consolidated revenues. The following table
summarizes the rental income, net operating income and total assets for each
reportable segment for the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
----------------------
2001 2000
---------- ----------
Rental Income:
Office segment......................................... $ 103,546 $ 110,117
Industrial segment..................................... 11,715 13,115
Retail segment......................................... 9,695 8,395
Apartment segment...................................... 3,270 4,554
---------- ----------
Total Rental Income................................ $ 128,226 $ 136,181
========== ==========
Net Operating Income:
Office segment......................................... $ 73,124 $ 77,125
Industrial segment..................................... 9,976 10,851
Retail segment......................................... 6,584 6,049
Apartment segment...................................... 1,791 2,817
---------- ----------
Total Net Operating Income......................... 91,475 96,842
---------- ----------
Reconciliation to income before extraordinary item:
Equity in income of unconsolidated affiliates.......... 744 827
Gain on disposition of land and depreciable assets..... 7,071 6,946
Interest and other income.............................. 6,754 3,274
Interest expense....................................... (27,609) (26,879)
General and administrative expense..................... (4,914) (4,965)
Depreciation and amortization.......................... (29,125) (28,271)
---------- ----------
Income before extraordinary item....................... $ 44,396 $ 47,774
========== ==========
Total Assets:
Office segment......................................... $2,676,250 $2,995,360
Industrial segment..................................... 337,605 435,022
Retail segment......................................... 243,538 258,853
Apartment segment...................................... 86,761 118,549
Corporate and other.................................... 196,922 164,295
---------- ----------
Total Assets....................................... $3,541,076 $3,972,079
========== ==========
3. LEGAL CONTINGENCIES
On October 2, 1998, John Flake, a former stockholder of J.C. Nichols, filed
a putative class action lawsuit on behalf of himself and the other former
stockholders of J.C. Nichols in the United States District Court for the
District of Kansas against J.C. Nichols, certain of its former officers and
directors and the Company. The complaint asserts claims against J.C. Nichols
and certain named directors and officers of J.C. Nichols for breach of
fiduciary duty to J.C. Nichols' stockholders, and to members of the J.C.
Nichols Company Employee Stock Ownership Trust, as well as claims under Section
14(a) of the Securities Exchange Act of 1934 Sections 11 and 12(2) of the
Securities Act of 1933 variously against J.C. Nichols, the named directors and
officers of J.C. Nichols and the Company. By order dated June 18, 1999, the
court granted in part and denied in part our
10
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
motion to dismiss, and the court thereafter certified the proposed class of
plaintiffs with respect to the remaining claims. By order dated August 28,
2000, the court granted in part and denied in part defendants' summary judgment
motion. Defendants sought reconsideration of the court's ruling with respect to
certain of the securities claims as to which the court denied their summary
judgment motion, and by order dated January 11, 2001, the court granted in part
that reconsideration motion. On the eve of the trial of this matter, the
parties settled all their remaining claims. The parties have executed a
Stipulation of Settlement, which has been submitted to the court. The final
settlement hearing is scheduled for May 24, 2001. We do not believe the
settlement will have a material adverse effect on our business, financial
condition or results of operations.
4. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, we adopted Financial Accounting Standards Board
Statement (SFAS) No. 133/138, "Accounting for Derivative Instruments and
Hedging Activities," as amended. This Statement requires us 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 derivatives
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. In connection with the adoption of SFAS 133/138 in
January 2001, we recorded a net transition adjustment of $555,962 of unrealized
loss in interest and other income and a net transition adjustment of $125,000
in AOCL. Adoption of the standard also resulted in our recognizing $127,000 of
derivative instrument liabilities and a reclassification of approximately $10.6
million of deferred financing costs from past cashflow hedging relationships
from other assets to AOCL.
Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cashflows and to lower overall borrowing
costs. To achieve these objectives, 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
these derivatives for trading or speculative purposes.
All of our derivatives are designated as cashflow hedges (i.e., hedging the
exposure of variability in expected future cash flows that is attributable to a
particular risk) at March 31, 2001. The effective portion of the cumulative
loss on the derivative instruments was $10.6 million at March 31, 2001 and is
reported as a component of AOCL in shareholders' equity and recognized into
earnings in the same period or periods during which the hedged transaction
affects earnings (as the underlying debt is paid down). We expect that the
portion of the cumulative loss recorded in AOCL at March 31, 2001 associated
with the derivative instruments that will be recognized within the next 12
months will be approximately $1.5 million. The ineffective portion of our
derivatives' changes in fair value has resulted in a loss of $1.0 million and
is reported in interest and other income on the Consolidated Statements of
Income at March 31, 2001.
Derivative liabilities totaling approximately $860,788 related to our
interest rate swap, cap and collar agreements, with a notional amount of $113.1
million, are recorded in other accounts payable, accrued expenses and other
liabilities in the Consolidated Condensed Balance Sheets at March 31, 2001. The
fair value of our interest rate swap, cap and collar agreements was ($860,788)
at March 31, 2001 and is based on individual market values as calculated
monthly using a published forward curve for the floating portion and the agreed
upon fixed rate for the fixed portion of the interest rate swap, cap and collar
agreements.
11
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.
Results of Operations
Revenues from rental operations decreased $8.0 million, or 5.9%, from $136.2
million for the three months ended March 31, 2000 to $128.2 million for the
comparable period in 2001. The decrease is primarily a result of the
disposition and contribution of 6.5 million square feet of wholly owned office,
industrial and retail properties and 277 apartment units, offset in part by the
acquisition of 741,000 square feet of wholly owned office properties and the
completion of 2.2 million square feet of development activity during the last
nine months of 2000 and the first three months of 2001. Our in-service
portfolio decreased from 40.2 million square feet at March 31, 2000 to 36.5
million square feet at March 31, 2001. Same property revenues, which are the
revenues of the 455 in-service properties and 1,608 apartment units owned on
January 1, 2000, increased 3.3% for the three months ended March 31, 2001,
compared to the same three months of 2000.
During the three months ended March 31, 2001, 161 leases representing 1.1
million square feet of office, industrial and retail space were executed at an
average rate per square foot which was 7.9% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $3.5 million, or 106.1%, from $3.3
million for the three months ended March 31, 2000 to $6.8 million for the
comparable period in 2001. The increase was a result of an increase in interest
income and third party fee income partly offset by an adjustment related to the
adoption of FASB 133.
Rental operating expenses decreased $2.5 million, or 6.4%, from $39.3
million for the three months ended March 31, 2000 to $36.8 million for the
comparable period in 2001. The decrease is primarily a result of the
disposition and contribution of 6.5 million square feet of wholly owned office,
industrial and retail properties and 277 apartment units, offset in part by the
acquisition of 741,000 square feet of wholly owned office properties and the
completion of 2.2 million square feet of development activity during the last
nine months of 2000 and the first three months of 2001. Rental operating
expenses as a percentage of related revenues remained constant at 29.0% for the
three months ended March 31, 2000 and 2001.
Depreciation and amortization for the three months ended March 31, 2001 and
2000 was $29.1 million and $28.3 million, respectively. The increase of
$854,000, or 2.8%, is due to an increase in tenant improvements in 2000 and
2001. Interest expense increased $0.7 million, or 2.6%, from $26.9 million for
the three months ended March 31, 2000 to $27.6 million for the comparable
period in 2001. The increase is attributable to a decrease in capitalized
interest from 2000 to 2001. Interest expense for the three months ended March
31, 2001 and 2000 included $665,000 and $721,000, respectively, of amortization
of deferred financing costs and the costs related to our interest rate hedge
contracts. General and administrative expenses increased 0.1% from 3.5% of
total revenue for the three months ended March 31, 2000 to 3.6% for the
comparable period in 2001.
Income before extraordinary item was $44.4 million and $47.8 million for the
three months ended March 31, 2001 and 2000, respectively. The Operating
Partnership recorded $8.1 million in preferred unit distributions for the three
months ended March 31, 2001 and 2000.
Liquidity and Capital Resources
Statement of Cash Flows. For the three months ended March 31, 2001, the
Operating Partnership generated $64.9 million in cash flows from operating
activities and $40.3 million from investing activities (primarily as a result
of the dispositions of real estate assets and repayments from subsidiaries,
partly offset in
12
part by additions to real estate assets). These combined cash flows of $105.2
million were used during the quarter to partly fund financing activities of
$163.9 million, primarily consisting of the repurchase of Common Units and the
payment of distributions.
Capitalization. The Operating Partnership's total indebtedness at March 31,
2001 totaled $1.6 billion and was comprised of approximately $610.0 million of
secured indebtedness with a weighted average interest rate of 7.8% and $1.0
billion of unsecured indebtedness with a weighted average interest rate of
7.3%. Except as stated below, all of the mortgage and notes payable outstanding
at March 31, 2001 were either fixed rate obligations or variable rate
obligations covered by interest rate hedge contracts. Approximately $32.5
million of floating rate notes were not covered by interest rate hedge
contracts on March 31, 2001.
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under our $300.0 million
unsecured revolving loan (the "Revolving Loan") bear interest at variable
rates. Our long-term debt, which consists of 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.
The following table sets forth information regarding our interest rate hedge
contracts as of March 31, 2001:
Fair
Notional Maturity Market
Type of Hedge Amount Date Reference Rate Fixed Rate Value
- ------------- -------- -------- -------------------- ---------- ---------
Swap............ $19,671 6/10/02 1-Month LIBOR + 0.75% 6.95% $(392,540)
Collar.......... 80,000 10/15/01 1-Month LIBOR 5.60--6.25% (468,248)
Cap............. 13,434 6/15/01 1-Month LIBOR 7.75% --
The interest rate on our variable rate debt is adjusted at one-month
intervals, subject to settlements under these contracts. Net
(receipts)/payments made to counterparties under interest rate hedge contracts
were $(24,105) during the first quarter of 2001 and $7,540 during the first
quarter of 2000, and were recorded as (decreases)/increases to interest
expense.
In addition, we are exposed to certain losses in the event of nonperformance
by the counterparties under the interest rate 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 contracts.
Current and Future Cash Needs. Historically, rental revenue has been the
principal source of funds to pay operating expenses, debt service, stockholder
distributions and capital expenditures, excluding nonrecurring 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 in-service properties, other
than normal recurring building improvements, tenant improvements and lease
commissions. We expect to meet our short-term liquidity requirements generally
through working capital and net cash provided by operating activities along
with the Revolving Loan.
Our short-term (within the next 12 months) liquidity needs also include,
among other things, the funding of approximately $80.0 million of our existing
development activity. We expect to fund our short-term liquidity needs through
a combination of:
13
. additional borrowings under our Revolving Loan (approximately $248.0
million was available as of March 31, 2001);
. the issuance of secured debt;
. the selective disposition of non-core assets; and
. the sale or contribution of some of our wholly owned properties to
strategic joint ventures to be formed with selected partners interested
in investing with us, which will have the net effect of generating
additional capital through such sale or contributions.
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 Loan and long-term
unsecured debt. We remain committed to maintaining a flexible and conservative
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 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 or the
incurrence of other debt.
We anticipate that our available cash and cash equivalents and cash flows
from operating activities, together 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 satisfy our cash requirements may be adversely
affected.
Recent Developments
Unit Repurchases. On April 25, 2001, the Company announced that it had
essentially completed its previously announced 10.0 million share and unit
repurchase program pursuant to which the Company repurchased 9.9 million shares
of Common Stock and Common Units at a weighted average price of $24.18 per
share/unit, for a total purchase price of $239.2 million. In addition, the
Company announced that its board of directors has authorized the repurchase of
up to an additional 5.0 million shares of Common Stock and Common Units. To
date, the Company has not repurchased any shares or units under its new
program. For each share of Common Stock repurchased by the Company, one
equivalent Common Unit is retired.
Disposition Activity. During the three months ended March 31, 2001, we sold
approximately 76,000 rentable square feet of office properties, 277 apartment
units and 73.0 acres of development land for gross proceeds of $49.7 million.
In addition, we currently have 182,000 rentable square feet of wholly owned
properties and 1,395 apartment units under contract for sale in various
transactions totaling $120.0 million. These transactions are subject to
customary closing conditions, including due diligence and documentation, and
are expected to close at various times throughout 2001. However we can provide
no assurance that all or parts of these transactions will be consummated.
As of May 14, 2001, we expect to use a portion of the net proceeds from our
recent and pending disposition activity to reinvest in tax-deferred exchange
transactions under Section 1031 of the Internal Revenue Code. We expect to
reinvest up to $10.0 million of the remaining net proceeds from completed
disposition activity and up to 112.0 million of the net proceeds from pending
disposition activity to acquire in tax-deferred exchange transactions in-
service properties, development land and development projects located in core
markets and in sub-markets where we have a strong presence. For an exchange to
qualify for tax-deferred treatment under Section 1031, the net proceeds from
the sale of a property must be held by an escrow agent until applied toward the
purchase of real estate qualifying for gain deferral.
14
Given the competition for properties meeting our investment criteria, there may
be some delay in reinvesting such proceeds. Delays in reinvesting such proceeds
will reduce our income from operations. In addition, the use of net proceeds
from dispositions to fund development activity, either through direct payments
or repayment of borrowings under our Revolving Loan, will reduce our income
from operations until such development projects are placed in service.
Possible Environmental Liabilities
In connection with owning or operating our properties, we may be liable for
certain costs due to possible environmental liabilities. Under various laws,
ordinances and regulations, such as the Comprehensive Environmental Response
Compensation and Liability Act, and common law, an owner or operator of real
estate is liable for the costs to remove or remediate certain hazardous or
toxic chemicals or substances on or in the property. Owners or operators are
also liable for certain other costs, including governmental fines and injuries
to persons and property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
the hazardous or toxic chemicals or substances. The presence of such
substances, or the failure to remediate such substances properly, may adversely
affect the owner's or operator's ability to sell or rent such property or to
borrow using such property as collateral. Persons who arrange for the disposal,
treatment or transportation of hazardous or toxic chemicals or substances may
also be liable for the same types of costs at a disposal, treatment or storage
facility, whether or not that person owns or operates that facility.
Certain environmental laws also impose liability for releasing asbestos-
containing materials. Third parties may seek recovery from owners or operators
of real property for personal injuries associated with asbestos-containing
materials. A number of our properties have asbestos-containing materials or
material that we presume to be asbestos-containing materials. In connection
with owning and operating our properties, we may be liable for such costs.
In addition, it is not unusual for property owners to encounter on-site
contamination caused by off-site sources. The presence of hazardous or toxic
chemicals or substances at a site close to a property could require the
property owner to participate in remediation activities or could adversely
affect the value of the property. Contamination from adjacent properties has
migrated onto at least three of our properties; however, based on current
information, we do not believe that any significant remedial action is
necessary at these affected sites.
As of the date hereof, we have obtained Phase I environmental assessments
(and, in certain instances, Phase II environmental assessments) on
substantially all of our in-service properties. These assessments have not
revealed, nor are we aware of, any environmental liability at our properties
that we believe would materially adversely affect our financial position,
operations or liquidity taken as a whole. This projection, however, could be
incorrect depending on certain factors. For example, material environmental
liabilities may have arisen after the assessments were performed or our
assessments may not have revealed all environmental liabilities or may have
underestimated the scope and severity of environmental conditions observed.
There may also be unknown environmental liabilities at properties for which we
have not obtained a Phase I environmental assessment or have not yet obtained a
Phase II environmental assessment. In addition, we base our assumptions
regarding environmental conditions, including groundwater flow and the
existence and source of contamination, on readily available sampling data. We
cannot guarantee that such data is reliable in all cases. Moreover, we cannot
provide any assurances (1) that future laws, ordinances or regulations will not
impose a material environmental liability or (2) that tenants, the condition of
land or operations in the vicinity of our properties or unrelated third parties
will not affect the current environmental condition of our properties.
Some tenants use or generate hazardous substances in the ordinary course of
their respective businesses. In their leases, we require these tenants to
comply with all applicable laws and to be responsible to us for any damages
resulting from their use of the property. We are not aware of any material
environmental problems resulting from tenants' use or generation of hazardous
or toxic chemicals or substances. We cannot provide any assurances, however,
that all tenants will comply with the terms of their leases or remain solvent.
If tenants do not comply or do not remain solvent, we may at some point be
responsible for contamination caused by such tenants.
15
Compliance with the Americans with Disabilities Act
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers, and noncompliance could result in imposition of
fines by the U.S. government or an award of damages to private litigants.
Although we believe that our properties are substantially in compliance with
these requirements, we may incur additional costs to comply with the ADA.
Although we believe that such costs will not have a material adverse effect on
us, if required changes involve a greater expenditure than we currently
anticipate, our results of operations, liquidity and capital resources could be
materially adversely affected.
Funds From Operations and Cash Available for Distributions
We consider funds from operations ("FFO") to be a useful financial
performance measure of the operating performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt
and to fund acquisitions and other capital expenditures. FFO does not represent
net income or cash flows from operating, investing or financing activities as
defined by Generally Accepted Accounting Principles ("GAAP"). It should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity. FFO does not measure
whether cash flow is sufficient to fund all cash needs, including principal
amortization, capital improvements and distributions to stockholders. Further,
FFO as disclosed by other REITs may not be comparable to our calculation of
FFO, as described below. FFO and cash available for distributions should not be
considered as alternatives to net income as an indication of our performance or
to cash flows as a measure of liquidity.
FFO equals net income (computed in accordance with GAAP) excluding gains (or
losses) from debt restructuring and sales of depreciable assets, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. In March 1995, the National Association of
Real Estate Investment Trusts ("NAREIT") issued a clarification of the
definition of FFO. This clarification provides that amortization of deferred
financing costs and depreciation of non-real estate assets are no longer to be
added back to net income in arriving at FFO. In October 1999, NAREIT issued an
additional clarification effective as of January 1, 2000 stipulating that FFO
should include both recurring and non-recurring operating results. Consistent
with this clarification, non-recurring items that are not defined as
"extraordinary" under GAAP will be reflected in the calculation of FFO. Gains
and losses from the sale of depreciable operating property will continue to be
excluded from the calculation of FFO.
Cash available for distribution 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.
16
FFO and cash available for distribution for the three and nine month periods
ended March 31, 2001 and 2000 are summarized in the following table (unaudited
and in thousands):
Three Months
Ended March 31,
----------------
2001 2000
------- -------
Funds from Operations:
Income before extraordinary
item....................... $44,396 $47,774
Add/(Deduct):
Distributions to preferred
unit-holders............. (8,145) (8,145)
Transition adjustment upon
adoption of FASB 133..... 556 --
Gain on disposition of
land and depreciable
assets................... (7,071) (6,946)
Gain on disposition of
land..................... 1,026 --
Depreciation and
amortization............. 29,125 28,271
Depreciation of
unconsolidated
affiliates............... 1,909 782
------- -------
Funds from operations
before minority
interest................. 61,796 61,736
Cash Available for
Distribution:
Add/(Deduct):
Rental income from
straight-line rents...... (3,102) (3,800)
Amortization of deferred
financing costs.......... 665 721
Non-incremental revenue
generating capital
Expenditures (1):
Building improvements
paid................... (1,073) (1,369)
Second generation tenant
improvements paid...... (3,755) (4,782)
Second generation lease
commissions paid....... (4,787) (3,131)
------- -------
Cash available for
distribution............... $49,744 $49,375
======= =======
Weighted average Common
Units Outstanding--Basic... 63,605 68,766
======= =======
Weighted average Common
Units Outstanding--
Diluted.................... 63,870 68,851
======= =======
Dividend payout ratio--
Diluted:
Funds from operations....... 58.9% 61.9%
======= =======
Cash available for
distribution............... 78.2% 77.4%
======= =======
- --------
(1) Amounts represent cash expenditures.
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations." 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:
.our markets could suffer unexpected increases in development of office,
industrial and retail properties;
.the financial condition of our tenants could deteriorate;
.the costs of our development projects could exceed our original estimates;
17
. 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;
. we may have incorrectly assessed the environmental condition of our
properties;
. 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 could lose key executive officers; and
. our southeastern markets may suffer an unexpected decline in economic
growth or increase in unemployment rates.
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.
18
Property Information
The following table sets forth certain information with respect to our
wholly owned in-service and development properties (excluding apartment units)
as of March 31, 2001 and 2000:
Rentable Percent
Square Leased/
March 31, 2001 Feet Pre-Leased
- -------------- ---------- ----------
In-Service:
Office................................................. 24,509,000 94%
Industrial............................................. 10,358,000 95%
Retail(1).............................................. 1,645,000 94%
---------- ---
Total or Weighted Average............................. 36,512,000 94%
========== ===
Development:
Completed--Not Stabilized
Office................................................. 524,000 78%
Industrial............................................. 306,000 52%
Retail................................................. -- --
---------- ---
Total or Weighted Average............................. 830,000 69%
========== ===
In Process
Office................................................. 2,079,000 52%
Industrial............................................. 122,000 --
Retail................................................. 20,000 34%
---------- ---
Total or Weighted Average............................. 2,221,000 61%
========== ===
Total:
Office................................................. 27,112,000
Industrial............................................. 10,786,000
Retail................................................. 1,665,000
----------
Total or Weighted Average............................. 39,563,000
==========
March 31, 2000
- --------------
In-Service:
Office................................................. 27,517,000 94%
Industrial............................................. 11,153,000 93%
Retail................................................. 1,543,000 95%
---------- ---
Total or Weighted Average............................. 40,213,000 94%
========== ===
Development:
Completed--Not Stabilized
Office................................................. 1,745,000 69%
Industrial............................................. 297,000 60%
Retail................................................. 180,000 94%
---------- ---
Total or Weighted Average............................. 2,222,000 70%
========== ===
In Process
Office................................................. 1,101,000 78%
Industrial............................................. 284,000 57%
Retail................................................. -- --
---------- ---
Total or Weighted Average............................. 1,385,000 74%
========== ===
Total:
Office................................................. 30,363,000
Industrial............................................. 11,734,000
Retail................................................. 1,723,000
----------
Total or Weighted Average............................. 43,820,000
==========
- --------
(1) Excludes basement space
19
As of March 31, 2001, we were developing 24 suburban office properties and
four industrial properties totaling 3.1 million rentable square feet of office
and industrial space. The following table summarizes these development
projects. In addition to the properties described in this table, we are
developing with our joint venture partners seven additional properties totaling
859,000 rentable square feet. At March 31, 2001, these seven development
projects had an aggregate budgeted cost of $107.1 million and were 67.0% pre-
leased.
In-Process
Rentable Pre-Leasing
Square Estimated Cost at Percentage Estimated Estimated
Name Market Feet Cost 3/31/01 (1) Completion Stabilization
---- ------ --------- --------- ------- ----------- ---------- -------------
($ in thousands)
Office:
Highwoods Preserve V Tampa 185,000 $ 27,633 $17,273 100% 3Q01 3Q01
Met Life Building at
Brookfield(2) Greenville 118,000 13,220 3,938 67% 3Q01 4Q01
Romac Tampa 128,000 18,582 5,967 100% 4Q01 4Q01
Verizon Wireless(2) Greenville 193,000 16,356 2,975 100% 1Q02 1Q02
International Place 3 Memphis 214,000 34,272 5,462 100% 2Q02 2Q02
Cool Springs II Nashville 205,000 22,718 16,294 19% 2Q01 2Q02
Centre Green Two(2) Research Triangle 97,000 11,596 6,225 61% 2Q01 2Q02
ParkWest One(2) Research Triangle 46,000 4,364 1,871 28% 2Q01 2Q02
ParkWest Two(2) Research Triangle 48,000 4,544 1,998 100% 2Q01 2Q02
Hickory Trace Nashville 52,000 5,933 4,260 -- 3Q01 3Q02
Centre Green Four(2) Research Triangle 100,000 11,764 4,418 -- 3Q01 3Q02
North Shore Commons A Richmond 115,000 13,084 9,003 58% 2Q01 3Q02
Stony Point III(2) Richmond 107,000 11,425 2,577 45% 2Q01 3Q02
Shadow Creek II(2) Memphis 81,000 8,750 1,877 -- 4Q01 4Q02
Highwoods Park at
Jefferson Village(2) Piedmont Triad 101,000 9,839 1,159 -- 4Q01 4Q02
GlenLake I(2) Research Triangle 158,000 19,089 3,011 -- 4Q01 4Q02
Seven Springs I(2) Nashville 131,000 15,556 3,739 -- 1Q02 1Q03
--------- -------- ------- ----
In-Process Office
Total or Weighted
Average 2,079,000 $248,725 $92,047 52%
========= ======== ======= ====
Industrial:
Tradeport Place IV Atlanta 122,000 $ 4,447 $ 1,988 -- 3Q01 3Q02
--------- -------- ------- ----
In-Process Industrial
Total or Weighted
Average 122,000 $ 4,447 $ 1,988 --
========= ======== ======= ====
Retail:
Plaza Redevelopment
(Grauada Shops) Kansas City 20,000 $ 4,680 $ 176 34% 4Q01 4Q01
--------- -------- ------- ----
In-Process Retail
Total or Weighted
Average 20,000 $ 4,680 $ 176 34%
========= ======== ======= ====
Total or Weighted
Average of all
In-Process
Development Projects 2,221,000 $257,852 $94,211 49%
========= ======== ======= ====
- --------
(1) Letters of intent comprise 2% of the Total Pre-Leasing Percentage.
(2) We are developing these properties for a third party and own an option to
purchase each property.
20
Completed--Not Stabilized
Rentable Pre-Leasing Estimated
Square Estimated Cost at Percentage Estimated Stabilization
Name Market Feet Cost 3/31/01 (1) Completion (2)
---- ----------------- --------- --------- -------- ----------- ---------- -------------
( $ in thousands)
Office:
Deerfield III Atlanta 54,000 $ 5,276 $ 4,185 100% 4Q00 3Q01
Shadow Creek Memphis 80,000 8,989 7,547 82% 4Q00 4Q01
380 Park Place Tampa 82,000 9,675 8,419 78% 1Q01 4Q01
Highwoods Plaza Tampa 66,000 7,505 6,436 30% 4Q00 1Q02
Situs III Research Triangle 39,000 4,543 2,693 94% 1Q01 1Q02
Maplewood Research Triangle 36,000 3,901 3,240 100% 1Q01 1Q02
Highwoods Tower II Research Triangle 167,000 25,134 19,601 75% 1Q01 2Q02
--------- -------- -------- --- ---- ----
Office Total or Weighted
Average 524,000 $ 65,023 $ 52,121 78%
========= ======== ======== ===
Industrial:
Holden Road Piedmont Triad 64,000 $ 2,014 $ 1,750 60% 1Q01 3Q01
Tradeport Place III Atlanta 122,000 4,780 4,568 100% 4Q00 4Q01
Enterprise Center I Piedmont Triad 120,000 3,807 3,218 -- 4Q00 4Q01
--------- -------- -------- ---
Completed-Not Stabilized
Retail Total or
Weighted Average 306,000 $ 10,601 $ 9,536 52%
========= ======== ======== ===
Total or Weighted
Average of all
Completed-Not
Stabilized Development
Projects 830,000 $ 75,624 $ 61,657 69%
--------- -------- -------- ---
Total or Weighted
Average of all
Development Projects 3,051,000 $333,476 $155,868 54%
========= ======== ======== ===
- --------
(1) Letters of intent comprise 2% of the Total Pre-leasing Percentage.
21
Rentable
Square Estimated Pre-Leasing
Feet Cost Percentage(1)
-------- -------------- ------------
(in thousands)
Development Analysis
Summary by Estimated Stabilization Date:
Second Quarter 2001........................ -- -- --
Third Quarter 2001......................... 303,000 $ 34,923 92%
Fourth Quarter 2001........................ 670,000 63,733 69%
First Quarter 2002......................... 334,000 32,305 85%
Second Quarter 2002........................ 777,000 102,628 64%
Third Quarter 2002......................... 496,000 46,653 23%
Fourth Quarter 2002........................ 340,000 37,678 --
First Quarter 2003......................... 131,000 15,556 --
--------- -------- ---
Total or Weighted Average................ 3,051,000 $333,476 54%
========= ======== ===
Summary by Market:
Atlanta.................................... 298,000 $ 14,503 59%
Greenville................................. 311,000 29,576 87%
Kansas City................................ 20,000 4,680 34%
Memphis.................................... 375,000 52,011 75%
Nashville.................................. 388,000 44,207 10%
Piedmont Triad............................. 285,000 15,660 13%
Research Triangle.......................... 691,000 84,935 46%
Richmond................................... 222,000 24,509 52%
Tampa...................................... 461,000 63,395 86%
--------- -------- ---
Total or Weighted Average................ 3,051,000 $333,476 54%
========= ======== ===
Build-to-Suit.............................. 720,000 $ 96,843 100%
Multi-Tenant............................... 2,331,000 236,633 40%
--------- -------- ---
Total or Weighted Average................ 3,051,000 $333,476 54%
========= ======== ===
Average
Rentable Average
Square Estimated Pre-Leasing
Feet Cost Percentage(1)
--------- --------- ------------
(in thousands)
Per Property Type:
Office..................................... 108,458 $ 13,073 57%
Industrial................................. 107,000 3,762 37%
Retail..................................... 20,000 4,680 34%
--------- -------- ---
All........................................ 105,207 $ 11,499 54%
========= ======== ===
- --------
(1) Letters of intent comprise 2% of the Total Pre-Leasing Percentage.
22
The following table sets forth certain information about leasing activities
at our wholly owned in-service properties (excluding apartment units) for the
three months ended March 31, 2001 and December 31, September 30 and June 30,
2000.
Office Leasing Statistics
Three Months Ended
------------------------------------------------------------
3/31/01 12/31/00 9/30/00 6/30/00 Average
----------- ----------- ---------- ---------- ----------
Net Effective Rents
Related to Re-Leased
Space:
Number of lease
transactions (signed
leases)................ 132 199 174 221 182
Rentable square footage
leased................. 941,419 1,187,466 1,056,239 990,663 1,043,947
Average per rentable
square foot over the
lease term:
Base rent............. $ 17.73 $ 17.51 $ 15.23 $ 18.43 $ 17.23
Tenant improvements... (1.13) (1.14) (1.21) (1.39) (1.22)
Leasing commissions... (0.57) (0.59) (0.40) (0.57) (0.53)
Rent concessions...... (0.01) (0.03) (0.03) (0.05) (0.03)
----------- ----------- ---------- ---------- ----------
Effective rent........ 16.02 15.75 13.59 16.42 15.45
Expense stop(1)....... (2.96) (4.73) (4.03) (5.37) (4.27)
----------- ----------- ---------- ---------- ----------
Equivalent effective
net rent............. $ 13.06 $ 11.02 $ 9.56 $ 11.05 $ 11.17
=========== =========== ========== ========== ==========
Average term in years... 5.3 4.6 4.9 4.6 4.8
=========== =========== ========== ========== ==========
Capital Expenditures
Related to Released
Space:
Tenant Improvements:
Total dollars
committed under
signed leases........ $ 7,103,609 $ 7,273,031 $6,676,576 $5,510,054 $6,640,817
Rentable square feet.. 941,419 1,187,466 1,056,239 990,663 1,043,947
----------- ----------- ---------- ---------- ----------
Per rentable square
foot................. $ 7.55 $ 6.12 $ 6.32 $ 5.56 $ 6.36
=========== =========== ========== ========== ==========
Leasing Commissions:
Total dollars
committed under
signed leases ....... $ 3,361,410 $ 2,873,345 $1,910,278 $2,392,441 $2,634,369
Rentable square feet.. 941,419 1,187,466 1,056,239 990,663 1,043,947
----------- ----------- ---------- ---------- ----------
Per rentable square
foot................. $ 3.57 $ 2.42 $ 1.81 $ 2.41 $ 2.52
=========== =========== ========== ========== ==========
Total:
Total dollars
committed under
signed leases........ $10,465,020 $10,146,377 $8,586,853 $7,902,495 $9,275,186
Rentable square feet.. 941,419 1,187,466 1,056,239 990,663 1,043,947
----------- ----------- ---------- ---------- ----------
Per rentable square
foot................. $ 11.12 $ 8.54 $ 8.13 $ 7.98 $ 8.88
=========== =========== ========== ========== ==========
Rental Rate Trends:
Average final rate
with expense pass
throughs............. $ 15.05 $ 15.83 $ 14.30 $ 16.59 $ 15.44
Average first year
cash rental rate..... $ 16.04 $ 16.38 $ 14.96 $ 17.58 $ 16.24
----------- ----------- ---------- ---------- ----------
Percentage increase... 6.6% 3.5% 4.6% 6.0% 5.2%
=========== =========== ========== ========== ==========
- --------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) which we
will not be reimbursed by our tenants.
23
Industrial Leasing Statistics
Three Months Ended
------------------------------------------------
3/31/01 12/31/00 9/30/00 6/30/00 Average
-------- -------- -------- -------- --------
Net Effective Rents Related
to Re-Leased Space:
Number of lease transactions
(signed leases)............ 27 31 31 46 34
Rentable square footage
leased..................... 190,663 355,947 349,079 362,521 314,553
Average per rentable square
foot over the lease term:
Base rent................. $ 5.88 $ 5.29 $ 4.54 $ 5.14 $ 5.21
Tenant improvements....... (0.20) (0.29) (0.32) (0.28) (0.27)
Leasing commissions....... (0.09) (0.15) (0.15) (0.12) (0.13)
Rent concessions.......... (0.00) (0.00) (0.00) (0.01) (0.00)
-------- -------- -------- -------- --------
Effective rent............ 5.59 4.85 4.07 4.73 4.81
Expense stop (1).......... (0.74) (0.30) (0.23) (0.48) (0.44)
-------- -------- -------- -------- --------
Equivalent effective net
rent..................... $ 4.85 $ 4.55 $ 3.84 $ 4.25 $ 4.37
======== ======== ======== ======== ========
Average term in years....... 2.5 2.7 3.6 4.2 3.3
======== ======== ======== ======== ========
Capital Expenditures Related
to Re-leased Space:
Tenant Improvements:
Total dollars committed
under signed leases...... $ 91,304 $412,679 $510,520 $389,592 $351,023
Rentable square feet...... 190,663 355,947 349,079 362,521 314,553
-------- -------- -------- -------- --------
Per rentable square foot.. $ 0.48 $ 1.16 $ 1.46 $ 1.07 $ 1.12
======== ======== ======== ======== ========
Leasing Commissions:
Total dollars committed
under signed leases........ $ 61,239 $145,117 $167,772 $185,028 $139,789
Rentable square feet........ 190,663 355,947 349,079 362,521 314,553
-------- -------- -------- -------- --------
Per rentable square foot.. $ 0.32 $ 0.41 $ 0.48 $ 0.51 $ 0.44
======== ======== ======== ======== ========
Total:
Total dollars committed
under signed leases...... $152,542 $557,796 $678,292 $574,620 $490,813
Rentable square feet...... 190,663 355,947 349,079 362,521 314,553
-------- -------- -------- -------- --------
Per rentable square foot.. $ 0.80 $ 1.57 $ 1.94 $ 1.59 $ 1.56
======== ======== ======== ======== ========
Rental Rate Trends:
Average final rate with
expense pass throughs...... $ 4.89 $ 4.92 $ 4.11 $ 4.44 $ 4.59
Average first year cash
rental rate................ $ 5.06 $ 5.23 $ 4.51 $ 4.72 $ 4.88
-------- -------- -------- -------- --------
Percentage increase......... 3.4% 6.3% 9.6% 6.4% 6.3%
======== ======== ======== ======== ========
- --------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) which we
will not be reimbursed by our tenants.
24
Retail Leasing Statistics
Three Months Ended
--------------------------------------------------
3/31/01 12/31/00 9/30/00 6/30/00 Average
-------- -------- -------- ---------- --------
Net Effective Rents
Related to Re-Leased
Space:
Number of lease
transactions (signed
leases).................. 9 15 21 15 15
Rentable square footage
leased................... 38,618 35,057 53,217 37,036 40,982
Average per rentable
square foot over the
lease term:
Base rent............... $ 29.31 $ 24.07 $ 22.26 $ 21.84 $ 24.37
Tenant improvements..... (1.86) (1.90) (1.26) (1.97) (1.75)
Leasing commissions..... (0.29) (0.49) (0.58) (0.57) (0.48)
Rent concessions........ (0.22) (0.00) (0.03) (0.00) (0.06)
-------- -------- -------- ---------- --------
Effective rent.......... 26.94 21.68 20.39 19.30 22.08
Expense stop (1)........ 0.00 0.00 0.00 ( 0.12) (0.03)
-------- -------- -------- ---------- --------
Equivalent effective net
rent................... $ 26.94 $ 21.68 $ 20.39 $ 19.18 $ 22.05
======== ======== ======== ========== ========
Average term in years..... 9.3 6.7 7.6 8.3 8.0
======== ======== ======== ========== ========
Capital Expenditures
Related to Re-leased
Space:
Tenant Improvements:
Total dollars committed
under signed leases.... $729,480 $655,301 $600,136 $ 914,200 $724,779
Rentable square feet.... 38,618 35,057 53,217 37,036 40,982
-------- -------- -------- ---------- --------
Per rentable square
foot................... $ 18.89 $ 18.69 $ 11.28 $ 24.68 $ 17.69
======== ======== ======== ========== ========
Leasing Commissions:
Total dollars committed
under signed leases.... $ 93,045 $ 66,986 $143,269 $ 175,122 $119,606
Rentable square feet.... 38,618 35,057 53,217 37,036 40,982
-------- -------- -------- ---------- --------
Per rentable square
foot................... $ 2.41 $ 1.91 $ 2.69 $ 4.73 $ 2.92
======== ======== ======== ========== ========
Total:
Total dollars committed
under signed leases.... $822,525 $722,287 $743,406 $1,089,322 $844,385
Rentable square feet.... 38,618 35,057 53,217 37,036 40,982
-------- -------- -------- ---------- --------
Per rentable square
foot................... $ 21.30 $ 20.60 $ 13.97 $ 29.41 $ 20.60
======== ======== ======== ========== ========
Rental Rate Trends:
Average final rate with
expense pass throughs.... $ 12.91 $ 18.41 $ 13.85 $ 16.60 $ 15.44
Average first year cash
rental rate.............. $ 19.70 $ 22.57 $ 19.40 $ 19.06 $ 20.18
-------- -------- -------- ---------- --------
Percentage increase....... 52.6% 22.6% 40.1% 14.8% 30.7%
======== ======== ======== ========== ========
- --------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) which we
will not be reimbursed by our tenants.
25
The following tables set forth scheduled lease expirations at our wholly
owned in-service properties (excluding apartment units) as of March 31, 2001,
assuming no tenant exercises renewal options.
Office Properties:
Percentage of Average Annual
Total Leased Square Annual Rents Rental Rate Percentage
Rentable Footage Under Expiring Per Square of Leased Rents
Number Square Feet Represented by Leases(1) Foot for Represented by
Year of Lease Expiration of Leases Expiring Expiring Leases (in thousands) Expirations(1) Expiring Leases
- ------------------------ --------- ------------- --------------- --------------- -------------- ---------------
2001.................... 599 2,431,357 10.5% $ 40,152 $16.51 10.3%
2002.................... 548 3,154,987 13.7% 52,079 16.51 13.4%
2003.................... 548 3,542,989 15.3% 59,604 16.82 15.3%
2004.................... 368 2,659,604 11.5% 46,824 17.61 12.1%
2005.................... 419 3,100,350 13.4% 52,818 17.04 13.6%
2006.................... 157 2,281,087 9.9% 37,545 16.46 9.7%
2007.................... 46 1,070,034 4.6% 16,668 15.58 4.3%
2008.................... 48 1,269,730 5.5% 19,018 14.98 4.9%
2009.................... 18 714,403 3.1% 11,431 16.00 2.9%
2010.................... 44 1,501,620 6.5% 26,205 17.45 6.7%
2011 and thereafter..... 45 1,382,964 6.0% 26,231 18.97 6.8%
----- ---------- ------ -------- ------ ------
2,840 23,109,125 100.0% $388,575 $16.81 100.0%
===== ========== ====== ======== ====== ======
Industrial Properties:
Percentage of Annual Average Annual
Total Leased Square Rents Under Rental Rate Percentage of
Rentable Footage Expiring Per Square Leased Rents
Number Square Represented by Leases(1) Foot for Represented by
Year of Lease Expiration of Leases Feet Expiring Expiring Leases (in thousands) Expirations(1) Expiring Leases
- ------------------------ --------- ------------- --------------- --------------- -------------- ---------------
2001.................... 110 1,450,864 14.5% $ 6,694 $ 4.61 14.4%
2002.................... 111 1,774,868 17.8% 7,797 4.39 16.7%
2003.................... 90 1,370,468 13.7% 6,875 5.02 14.7%
2004.................... 62 2,136,315 21.5% 8,912 4.17 19.1%
2005.................... 42 684,591 6.9% 3,995 5.84 8.6%
2006.................... 17 503,707 5.0% 2,806 5.57 6.0%
2007.................... 13 1,081,566 10.8% 4,425 4.09 9.5%
2008.................... 4 196,045 2.0% 1,306 6.66 2.8%
2009.................... 6 268,813 2.7% 1,819 6.77 3.9%
2010.................... 4 182,746 1.8% 1,043 5.71 2.2%
2011 and thereafter..... 6 326,680 3.3% 969 2.97 2.1%
----- ---------- ------ -------- ------ ------
465 9,976,663 100.0% $ 46,641 $ 4.68 100.0%
===== ========== ====== ======== ====== ======
- --------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
26
Retail Properties:
Percentage of Average Annual
Total Leased Square Annual Rents Rental Rate Percentage of
Rentable Footage Under Expiring Per Square Leased Rents
Number Square Feet Represented by Leases(1) Foot for Represented by
Year of Lease Expiration of Leases Expiring Expiring Leases (in thousands) Expirations(1) Expiring Leases
- ------------------------ --------- ----------- --------------- --------------- -------------- ---------------
2001.................... 46 153,464 10.0% $ 2,830 $18.44 8.7%
2002.................... 33 69,975 4.5% 1,389 19.85 4.3%
2003.................... 44 108,530 7.1% 2,460 22.67 7.6%
2004.................... 35 213,016 13.8% 2,658 12.48 8.2%
2005.................... 39 90,406 5.9% 2,543 28.13 7.8%
2006.................... 23 80,907 5.3% 1,971 24.36 6.1%
2007.................... 18 74,779 4.9% 1,492 19.95 4.6%
2008.................... 16 108,901 7.1% 3,607 33.12 11.1%
2009.................... 21 169,286 11.0% 3,184 18.81 9.8%
2010.................... 17 94,138 6.1% 2,471 26.25 7.6%
2011 and thereafter..... 24 375,561 24.3% 7,801 20.77 24.2%
----- ---------- ------ -------- ------ ------
316 1,538,963 100.0% $ 32,406 $21.06 100.0%
===== ========== ====== ======== ====== ======
Total:
Percentage of Average Annual
Total Leased Square Annual Rents Rental Rate Percentage of
Rentable Footage Under Expiring Per Square Leased Rents
Number Square Feet Represented by Leases(1) Foot for Represented by
Year of Lease Expiration of Leases Expiring Expiring Leases (in thousands) Expirations(1) Expiring Leases
- ------------------------ --------- ----------- --------------- --------------- -------------- ---------------
2001.................... 755 4,035,685 11.7% $ 49,676 $12.31 10.6%
2002.................... 692 4,999,830 14.4% 61,265 12.25 13.1%
2003.................... 682 5,021,987 14.5% 68,939 13.73 14.7%
2004.................... 465 5,008,935 14.6% 58,394 11.66 12.5%
2005.................... 500 3,875,347 11.2% 59,356 15.32 12.7%
2006.................... 197 2,865,701 8.3% 42,322 14.77 9.1%
2007.................... 77 2,226,379 6.4% 22,585 10.14 4.8%
2008.................... 68 1,574,676 4.5% 23,931 15.20 5.1%
2009.................... 45 1,152,502 3.3% 16,434 14.26 3.5%
2010.................... 65 1,778,504 5.1% 29,719 16.71 6.4%
2011 and thereafter..... 75 2,085,205 6.0% 35,001 16.79 7.5%
----- ---------- ------ -------- ------ ------
3,621 34,624,751 100.0% $467,622 $13.51 100.0%
===== ========== ====== ======== ====== ======
- --------
(1) Includes operating expenses pass throughs and excludes the effect of future
contractual rent increases.
Inflation
Historically inflation has not had a significant impact on our operations
because of the relatively low inflation rate in our geographic areas of
operation. Most of the leases require the tenants to pay their pro rata share
of increased incremental operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing our exposure to increases in
operating expenses resulting from inflation. In addition, many of the leases
are for terms of less than seven years, which may enable us to replace existing
leases with new leases at a higher base rent if rents on the existing leases
are below the market rate.
27
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
for a description of our accounting policies and other information related to
these financial instruments.
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under the Revolving Loan
bear interest at variable rates. Our long-term debt, which consists of 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 March 31, 2001, the Operating Partnership
had approximately $32.5 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 ended March 31, 2002, our interest expense would be increased or
decreased approximately $325,000. In addition, as of March 31, 2001, we had
$22.0 million of additional variable rate debt outstanding that was protected
by an interest rate collar that effectively keeps the interest rate within a
range of 65 basis points. We do not believe that a 100 basis point increase or
decrease in interest rates would materially affect our interest expense with
respect to this $22.0 million of debt.
Interest Rate Hedge Contracts. For a discussion of our interest rate hedge
contracts in effect at March 31, 2001, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Capitalization." If interest rates increase by 100 basis
points, the aggregate fair market value of these interest rate hedge contracts
as of March 31, 2001 would increase by approximately $559,000. If interest
rates decrease by 100 basis points, the aggregate fair market value of these
interest rate hedge contracts as of March 31, 2001 would decrease by
approximately $648,000.
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 contracts.
28
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On October 2, 1998, John Flake, a former stockholder of J.C. Nichols, filed
a putative class action lawsuit on behalf of himself and the other former
stockholders of J.C. Nichols in the United States District Court for the
District of Kansas against J.C. Nichols, certain of its former officers and
directors and the Company. The complaint asserts claims against J.C. Nichols
and certain named directors and officers of J.C. Nichols for breach of
fiduciary duty to J.C. Nichols' stockholders, and to members of the J.C.
Nichols Company Employee Stock Ownership Trust, as well as claims under Section
14(a) of the Securities Exchange Act of 1934 Sections 11 and 12(2) of the
Securities Act of 1933 variously against J.C. Nichols, the named directors and
officers of J.C. Nichols and the Company. By order dated June 18, 1999, the
court granted in part and denied in part our motion to dismiss, and the court
thereafter certified the proposed class of plaintiffs with respect to the
remaining claims. By order dated August 28, 2000, the court granted in part and
denied in part defendants' summary judgment motion. Defendants sought
reconsideration of the court's ruling with respect to certain of the securities
claims as to which the court denied their summary judgment motion, and by order
dated January 11, 2001, the court granted in part that reconsideration motion.
On the eve of the trial of this matter, the parties settled all their remaining
claims. The parties have executed a Stipulation of Settlement, which has been
submitted to the court. The final settlement hearing is scheduled for May 24,
2001. We do not believe the settlement will have a material adverse effect on
our business, financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
(c) In connection with the acquisition of real estate, the Operating
Partnership frequently issues Common Units to sellers of real estate in
reliance on exemptions from registration under the Securities Act.
Specifically, the Operating Partnership relies on the exemptions provided
by Section 4(2) of the Securities Act or Rule 506 under the Securities Act.
During the quarter ended March 31, 2001, the Operating Partnership issued
87,185 Common Units in offerings exempt from the registration requirements
of the Securities Act. The Operating Partnership exercised reasonable care
to assure that each of such offerees of Common Units were "accredited
investors" under Rule 501 of the Securities Act and that the investors were
not purchasing the Common Units with a view to their distribution.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On January 25, 2001, we filed a Current Report on Form 8-K reporting under
Item 5 that the Company had repurchased additional shares of Common Stock and
Common Units.
On April 27, 2001, we filed a Current Report on Form 8-K reporting under
Items 5 and 7 that the Company had essentially completed its previously
announced 10 million share and unit repurchase program and that the Company's
board of directors had authorized the repurchase of up to an additional 5
million shares of Common Stock and Common Units.
29
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
/s/ Ronald P. Gibson
By: _________________________________
Ronald P. Gibson
President and Chief Executive
Officer
/s/ Carman J. Liuzzo
By: _________________________________
Carman J. Liuzzo
Chief Financial Officer
(Principal Accounting Officer)
Date: May 15, 2001
30