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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 June 30, 2002
Commission file number: 000-21731
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HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1864557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
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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 JUNE 30, 2002
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements......................................................................... 3
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001........................ 4
Consolidated Statements of Income for the three and six months ended June 30, 2002
and 2001.................................................................................... 5
Consolidated Statements of Partners' Capital for the six months ended June 30, 2002.......... 6
Consolidated Statements of Cash Flows for the six months ended June 30, 2002
and 2001.................................................................................... 7
Notes to Consolidated Financial Statements................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 15
Disclosure Regarding Forward-Looking Statements.............................................. 15
Overview..................................................................................... 15
Critical Accounting Policies................................................................. 16
Results of Operations........................................................................ 18
Liquidity and Capital Resources.............................................................. 21
Recent Developments.......................................................................... 25
Impact of Recently Issued Accounting Standards............................................... 25
Funds From Operations and Cash Available for Distributions................................... 26
Property Information......................................................................... 28
Inflation.................................................................................... 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 38
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................. 39
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 2001 Annual Report on Form 10-K.
3
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
($ in thousands)
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land and improvements ......................................................... $ 421,603 $ 415,072
Buildings and tenant improvements ............................................. 2,948,230 2,923,242
Development in process ........................................................ 53,787 108,118
Land held for development ..................................................... 182,396 152,597
Furniture, fixtures and equipment ............................................. 19,837 19,392
-------------- --------------
3,625,853 3,618,421
Less - accumulated depreciation ............................................... (430,954) (381,675)
-------------- --------------
Net real estate assets ........................................................ 3,194,899 3,236,746
Property held for sale ........................................................... 68,754 101,292
Cash and cash equivalents ........................................................ 13,857 794
Restricted cash .................................................................. 4,556 5,685
Accounts receivable, net ......................................................... 15,315 23,302
Advances to related parties ...................................................... 788 788
Notes receivable ................................................................. 12,986 13,726
Accrued straight-line rents receivable ........................................... 49,407 49,078
Investment in unconsolidated affiliates .......................................... 74,380 78,084
Other assets:
Deferred leasing costs ........................................................ 110,584 102,135
Deferred financing costs ...................................................... 25,916 26,121
Prepaid expenses and other .................................................... 12,078 10,441
-------------- --------------
148,578 138,697
Less - accumulated amortization ............................................... (67,867) (59,637)
-------------- --------------
Other assets, net ........................................................... 80,711 79,060
-------------- --------------
Total Assets ..................................................................... $ 3,515,653 $ 3,588,555
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and notes payable ...................................................... $ 1,636,358 $ 1,672,230
Accounts payable, accrued expenses and other liabilities ......................... 94,436 114,920
-------------- --------------
Total Liabilities ............................................................. 1,730,794 1,787,150
Minority interest ................................................................ 325 318
Redeemable operating partnership units:
Class A Common Units, 7,049,362 and 7,143,747 outstanding at June 30, 2002
and December 31, 2001, respectively .......................................... 183,283 185,380
Class B Common Units, 0 and 196,492 outstanding at June 30, 2002 and
December 31, 2001, respectively .............................................. - 5,099
Series A Preferred Units, 104,945 outstanding at June 30, 2002 and
December 31, 2001 ............................................................ 103,308 103,308
Series B Preferred Units, 6,900,000 outstanding at June 30, 2002 and
December 31, 2001 ............................................................ 166,346 166,346
Series D Preferred Units, 400,000 outstanding at June 30, 2002 and
December 31, 2001 ............................................................ 96,842 96,842
Partners' Capital:
Class A Common Units:
General partner Common Units, 600,574 and 596,268 outstanding at June 30, 2002
and December 31, 2001, respectively .......................................... 12,464 12,569
Limited partner Common Units, 52,407,509 and 51,886,745 outstanding at
June 30, 2002 and December 31, 2001, respectively ............................ 1,235,032 1,244,545
Accumulated other comprehensive loss ............................................. (8,260) (9,441)
Deferred compensation - restricted units ......................................... (4,481) (3,561)
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Total Partners' Capital ....................................................... 1,234,755 1,244,112
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Total Liabilities and Partners' Capital .......................................... $ 3,515,653 $ 3,588,555
============== ==============
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
REVENUE:
Rental property ........................................... $ 118,224 $ 123,988 $ 241,788 $ 250,434
Equity in earnings of unconsolidated affiliates ........... 2,384 1,390 4,874 2,134
Interest and other income ................................. 1,532 6,897 4,394 13,649
-------------- -------------- -------------- --------------
Total Revenue ................................................ 122,140 132,275 251,056 266,217
OPERATING EXPENSES:
Rental property ........................................... 36,682 37,881 74,553 74,115
Depreciation and amortization ............................. 31,291 28,642 62,296 57,418
Interest expense:
Contractual ............................................. 26,517 25,225 51,944 52,169
Amortization of deferred financing costs ................ 341 675 680 1,340
-------------- -------------- -------------- --------------
26,858 25,900 52,624 53,509
General and administrative ................................... 4,153 5,100 8,750 10,013
-------------- -------------- -------------- --------------
Income before gain on disposition of land and depreciable
assets, discontinued operations and extraordinary item . 23,156 34,752 52,833 71,162
Gain on disposition of land and depreciable assets ........ 6,673 5,695 7,617 12,766
-------------- -------------- -------------- --------------
Income from continuing operations ....................... 29,829 40,447 60,450 83,928
DISCONTINUED OPERATIONS:
Income from discontinued operations ....................... 49 883 641 1,798
Gain on sale of discontinued operations ................... 2,964 - 2,964 -
-------------- -------------- -------------- --------------
3,013 883 3,605 1,798
Net income before extraordinary item ...................... 32,842 41,330 64,055 85,726
EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISHMENT OF DEBT ..... - (325) - (518)
-------------- -------------- -------------- --------------
Net income ................................................ 32,842 41,005 64,055 85,208
Distributions on preferred units ............................. (7,713) (7,929) (15,426) (16,074)
-------------- -------------- -------------- --------------
Net income available for Class A Common Units ................ $ 25,129 $ 33,076 $ 48,629 $ 69,134
============== ============== ============== ==============
NET INCOME PER COMMON UNIT--BASIC:
Income from continuing operations ......................... $ .37 $ .53 $ .75 $ 1.09
Income from discontinued operations ....................... .05 .02 .06 .03
Extraordinary item--loss on early extinguishment of debt .. - (.01) - (.01)
-------------- -------------- -------------- --------------
Net income ................................................ $ .42 $ .54 $ .81 $ 1.11
============== ============== ============== ==============
NET INCOME PER COMMON UNIT--DILUTED:
Income from continuing operations ......................... $ .37 $ .53 $ .75 $ 1.08
Income from discontinued operations ....................... .05 .02 .06 .03
Extraordinary item--loss on early extinguishment of debt .. - (.01) - (.01)
-------------- -------------- -------------- --------------
Net income ................................................ $ .42 $ .54 $ .81 $ 1.10
============== ============== ============== ==============
Distributions declared per common unit ....................... $ .585 $ .57 $ 1.17 $ 1.14
============== ============== ============== ==============
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING--BASIC:
Class A Common Units:
General Partner ......................................... 599 609 599 621
Limited Partners ........................................ 59,355 60,277 59,308 61,519
Class B Common Units:
Limited Partners ........................................ - 196 - 196
-------------- -------------- -------------- --------------
Total ..................................................... 59,954 61,082 59,907 62,336
============== ============== ============== ==============
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING--DILUTED:
Class A Common Units:
General Partner ......................................... 604 613 604 625
Limited Partners ........................................ 59,835 60,664 59,754 61,904
Class B Common Units:
Limited Partners ........................................ - 196 - 196
-------------- -------------- -------------- --------------
Total ..................................................... 60,439 61,473 60,358 62,725
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See accompanying notes to consolidated financial statements.
5
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Unaudited and $ in thousands)
For the Six Months Ended June 30, 2002
CLASS A COMMON UNIT
------------------------------- ACCUMULATED
GENERAL LIMITED OTHER
PARTNER'S PARTNERS' DEFERRED COMPREHENSIVE
CAPITAL CAPITAL COMPENSATION LOSS
-------------- -------------- -------------- --------------
Balance at December 31, 2001 ....................... $ 12,569 $ 1,244,545 $ (3,561) $ (9,441)
Offering proceeds .................................. - 11,626 - -
Redemption of Common Units ......................... (29) (2,733) - -
Distributions paid ................................. (700) (69,284) - -
Preferred distributions paid ....................... (154) (15,272) - -
Net income ......................................... 641 63,414 - -
Adjustments of redeemable Common Units
to fair value ..................................... 75 7,387 - -
Transfer of limited partners' interest ............. 120 (120) - -
Other comprehensive income ......................... - - - 1,181
Conversion of Common Units to
Common Shares ..................................... (74) (7,232) - -
Issuance of units for assets ....................... - 1,150 - -
Issuance of restricted stock ....................... 16 1,551 (1,567) -
Amortization of deferred compensation .............. - - 647 -
-------------- -------------- -------------- --------------
Balance at June 30, 2002 ........................... $ 12,464 $ 1,235,032 $ (4,481) $ (8,260)
============== ============== ============== ==============
TOTAL
PARTNERS'
CAPITAL
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Balance at December 31, 2001 ....................... $ 1,244,112
Offering proceeds .................................. 11,626
Redemption of Common Units ......................... (2,762)
Distributions paid ................................. (69,984)
Preferred distributions paid ....................... (15,426)
Net income ......................................... 64,055
Adjustments of redeemable Common Units
to fair value ..................................... 7,462
Transfer of limited partners' interest ............. -
Other comprehensive income ......................... 1,181
Conversion of Common Units to
Common Shares ..................................... (7,306)
Issuance of units for assets ....................... 1,150
Issuance of restricted stock ....................... -
Amortization of deferred compensation .............. 647
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Balance at June 30, 2002 ........................... $ 1,234,755
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See accompanying notes to consolidated financial statements.
6
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and $ in thousands)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2002 2001
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OPERATING ACTIVITIES:
Net income ........................................................................ $ 64,055 $ 85,208
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................. 63,602 59,451
Amortization of deferred compensation .......................................... 647 480
Equity in earnings of unconsolidated affiliates ................................ (4,874) (2,134)
Gain on disposition of land and depreciable assets ............................. (10,581) (12,766)
Reserve for deferred rent receivable ........................................... 3,110 -
Loss on early extinguishment of debt .......................................... - 518
Transition adjustment upon adoption of FASB 133 ................................ - 556
Loss on ineffective portion of derivative instruments .......................... - 428
Changes in operating assets and liabilities ....................................... (21,320) (21,516)
-------------- --------------
Net cash provided by operating activities .................................... 94,639 110,225
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INVESTING ACTIVITIES:
Additions to real estate assets ................................................... (63,921) (130,987)
Proceeds from disposition of real estate assets ................................... 120,200 105,500
Repayment from subsidiaries ....................................................... - 27,560
Distributions from unconsolidated affiliates ...................................... 5,336 3,856
Investments in notes receivable ................................................... 1,240 56,080
Other investing activities ........................................................ (5,614) 3,130
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Net cash provided by investing activities .................................... 57,241 65,139
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FINANCING ACTIVITIES:
Distributions paid on common units ................................................ (69,984) (71,603)
Distributions paid on preferred units ............................................. (15,426) (16,074)
Borrowings on mortgages and notes payable ......................................... 13,403 8,780
Repayment of mortgages and notes payable .......................................... (55,973) (92,671)
Borrowings on revolving loans ..................................................... 162,000 124,400
Repayment on revolving loans ...................................................... (183,000) (59,700)
Loss on early extinguishment of debt .............................................. - (518)
Net (redemptions)/proceeds of contributed capital ................................. 10,706 (1,520)
Repurchase of common units ........................................................ (2,762) (138,889)
Net change in deferred financing costs ............................................ 1,386 (529)
Other financing activities ........................................................ 833 -
-------------- --------------
Net cash used in financing activities ........................................ (138,817) (248,324)
-------------- --------------
Net increase/(decrease) in cash and cash equivalents .............................. 13,063 (72,960)
Cash and cash equivalents at beginning of the period .............................. 794 102,486
-------------- --------------
Cash and cash equivalents at end of the period .................................... $ 13,857 $ 29,526
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................ $ 58,243 $ 58,682
============== ==============
See accompanying notes to consolidated financial statements.
7
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 net assets contributed by the holders of
Common Units in the Operating Partnership and the net assets acquired subject to
mortgage notes payable.
SIX MONTHS ENDED JUNE 30,
-------------------------------
2002 2001
-------------- --------------
ASSETS:
Notes receivable .................................................................. $ 500 $ 675
Accounts receivable ............................................................... 139 -
Cash and cash equivalents ......................................................... 1,114 1,074
Rental property and equipment, net ................................................ 36,828 48,646
Deferred leasing costs ............................................................ 995 -
LIABILITIES:
Mortgages and notes payable ....................................................... 27,698 48,831
Accounts payable, accrued expenses and other liabilities .......................... 10,321 2,084
-------------- --------------
Net assets ................................................................... $ 1,557 $ (520)
============== ==============
See accompanying notes to consolidated financial statements.
8
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
1. DESCRIPTION OF THE OPERATING PARTNERSHIP
The Operating Partnership is managed by its general partner, the Company, a
self-administered and self-managed REIT that operates in the southeastern and
midwestern United States. The Operating Partnership's wholly-owned assets
include: 500 in-service office, industrial and retail properties; 1,303 acres of
undeveloped land suitable for future development; and an additional 10
properties under development.
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 June 30, 2002, the Company owned 88.3%
of the Common Units in the Operating Partnership. Limited partners (including
certain officers and directors of the Company) own the remaining Common Units.
Holders of Common Units may redeem them for the cash value of one share of
Common Stock, or, at the Company's option, one share of Common Stock. When a
Common Unit holder redeems a Common Unit for a share of Common Stock or cash,
the Company's minority interest in the Operating Partnership will be reduced and
its share in the Operating Partnership will be increased. The Common Units owned
by the Company are not redeemable for cash.
2. BASIS OF PRESENTATION
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 104,945 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.
9
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. BASIS OF PRESENTATION - CONTINUED
The Operating Partnership is generally 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.
Minority interest represents the limited partnership interest in a
partnership that was formed to develop real estate properties owned by holders
other than the Operating Partnership.
Certain amounts in the June 30, 2001 and December 31, 2001 financial
statements have been reclassified to conform to the June 30, 2002 presentation.
These reclassifications had no material effect on net income or partner's
capital as previously reported.
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 2001 Annual Report on
Form 10-K.
3. 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.
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 and six months ended June 30, 2002 and 2001 ($ in
thousands):
10
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. SEGMENT INFORMATION - CONTINUED
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
RENTAL PROPERTY INCOME:
Office segment ........................................ $ 97,927 $ 101,838 $ 200,844 $ 205,431
Industrial segment .................................... 10,783 11,933 21,329 23,513
Retail segment ........................................ 9,256 8,653 19,003 18,355
Apartment segment ..................................... 258 1,564 612 3,135
-------------- -------------- -------------- --------------
Total Rental Property Income ....................... $ 118,224 $ 123,988 $ 241,788 $ 250,434
============== ============== ============== ==============
NET OPERATING INCOME:
Office segment ........................................ $ 66,545 $ 69,676 $ 136,717 $ 142,674
Industrial segment .................................... 8,843 9,989 17,579 19,837
Retail segment ........................................ 6,071 5,584 12,689 12,175
Apartment segment ..................................... 83 858 250 1,633
-------------- -------------- -------------- --------------
Total Net Operating Income ......................... $ 81,542 $ 86,107 $ 167,235 $ 176,319
-------------- -------------- -------------- --------------
RECONCILIATION TO INCOME BEFORE GAIN ON DISPOSITION OF
LAND AND DEPRECIABLE ASSETS, DISCONTINUED
OPERATIONS AND EXTRAORDINARY ITEM:
Equity in earnings of unconsolidated affiliates ....... $ 2,384 $ 1,390 $ 4,874 $ 2,134
Interest and other income ............................. 1,532 6,897 4,394 13,649
Interest expense ...................................... (26,858) (25,900) (52,624) (53,509)
General and administrative expenses ................... (4,153) (5,100) (8,750) (10,013)
Depreciation and amortization ......................... (31,291) (28,642) (62,296) (57,418)
-------------- -------------- -------------- --------------
Income before gain on disposition of land and
depreciable assets, discontinued operations
and extraordinary item ............................ $ 23,156 $ 34,752 $ 52,833 $ 71,162
============== ============== ============== ==============
TOTAL ASSETS:
Office segment ........................................ $ 2,781,235 $ 2,684,292 $ 2,781,235 $ 2,684,292
Industrial segment .................................... 328,320 398,740 328,320 398,740
Retail segment ........................................ 249,797 258,135 249,797 258,135
Apartment segment ..................................... 11,741 39,607 11,741 39,607
Corporate and other ................................... 144,560 153,073 144,560 153,073
-------------- -------------- -------------- --------------
Total Assets ....................................... $ 3,515,653 $ 3,533,847 $ 3,515,653 $ 3,533,847
============== ============== ============== ==============
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
During the past several years, 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. As of June 30, 2002, our
joint ventures have approximately $548.6 million of outstanding debt. All of the
joint venture debt is non-recourse to us except (1) in the case of customary
exceptions pertaining to such matters as misuse of funds, environmental
conditions and material misrepresentations and (2) with respect to $5.0 million
of construction debt related to the MG-HIW Metrowest I, LLC, which has been
guaranteed in part by us subject to a pro rata indemnity from our joint venture
partner. Our guarantee of the MG-HIW Metrowest I, LLC debt represented 50.00% of
the outstanding loan balance at June 30, 2002. Selected financial data for
unconsolidated affiliates for the six months ended June 30, 2002 and 2001 is
presented below ($ in thousands):
11
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES - CONTINUED
PERCENT OWNED AT JUNE 30,
-------------------------
2002 2001
--------- ----------
Board of Trade Investment Company.......................................... 49.00% 49.00%
Dallas County Partners I, LP............................................... 50.00 50.00
Dallas County Partners II, LP.............................................. 50.00 50.00
Dallas County Partners III, LP............................................. 50.00 50.00
Fountain Three............................................................. 50.00 50.00
Dreilander-Fonds 98/29..................................................... 22.81 22.81
Dreilander-Fonds 97/26 and 99/32........................................... 42.93 44.70
RRHWoods, LLC.............................................................. 50.00 50.00
Highwoods-Markel Associates, LLC........................................... 50.00 50.00
MG-HIW, LLC................................................................ 20.00 20.00
MG-HIW Peachtree Corners, LLC.............................................. 50.00 50.00
MG-HIW Rocky Point, LLC (1)................................................ -- 50.00
MG-HIW Metrowest I, LLC.................................................... 50.00 50.00
MG-HIW Metrowest II, LLC................................................... 50.00 50.00
Concourse Center Associates, LLC........................................... 50.00 --
Plaza Colonnade, LLC....................................................... 50.00 --
JUNE 30, JUNE 30,
2002 2001
--------- ----------
Total assets............................................................... $ 851,879 $ 846,440
Total debt................................................................. 548,632 538,253
Total liabilities.......................................................... 574,830 568,467
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---------- ------------ ---------- ----------
Total net income............................ $ 7,788 $ 5,382 $ 16,385 $ 8,941
- ----------
(1) On June 26, 2002, we acquired our joint venture partner's interest in
MG-HIW Rocky Point, LLC to bring our ownership interest in that entity to
100.0%. At June 30, 2002, the assets and liabilities of this entity are
included in the consolidated balance sheet and, thus, are not included
under "Total assets", "Total debt" or "Total liabilities" in the above
table. However, net income from this joint venture is included in the
'Total net income' in the above table.
5. 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 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. 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.
12
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED
On the date that we enter into a derivative contract, we designate 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), or (2) 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. Changes in the fair value of non-hedging instruments are reported in
current-period earnings.
We formally document 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. We also assess
and document, 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 we determine that a derivative is not (or has ceased to be) highly
effective as a hedge, we discontinue hedge accounting prospectively.
During the six months ended June 30, 2002, we had an interest rate swap and
an interest rate collar each mature, resulting in a debit to the interest rate
derivative liability and an offsetting credit to AOCL of $411,000. As of June
30, 2002, we had no derivative instruments to be reported as Other Liabilities
or Assets. However, $8.3 million of deferred financing costs from past cash flow
hedging instruments remain in AOCL at June 30, 2002 and will be recognized into
earnings as the underlying debt is repaid. We expect that the portion of the
cumulative loss recorded in AOCL at June 30, 2002 associated with the derivative
instruments, which will be recognized within the next 12 months, will be
approximately $1.6 million.
On July 31, 2002, we entered into two $24.0 million five-year treasury lock
agreements with two financial counterparties at a fixed rate of 3.695% to
mitigate the change in expected interest payments on an anticipated five-year
fixed-rate financing. We expect that these treasury lock agreements will be
deemed highly effective in accordance with SFAS 133/138 and will be initially
reflected in AOCL on the consolidated balance sheet.
6. OTHER COMPREHENSIVE INCOME/(LOSS)
Other comprehensive income/(loss) represents net income plus the results of
certain non-partners' capital changes not reflected in the Consolidated
Statements of Income. The components of other comprehensive income/(loss) are as
follows ($ in thousands):
SIX MONTHS ENDED JUNE 30,
---------------------------------
2002 2001
---------- ----------
Net Income............................................................... $ 64,055 $ 85,208
Accumulated other comprehensive income/(loss):
Unrealized derivative gains/(losses) on cashflow hedges............... 411 (414)
Reclassification of past hedging relationships........................ - (10,597)
Amortization of past hedging relationships............................ 770 784
---------- ----------
Total other comprehensive income/(loss)............................. 1,181 (10,227)
---------- ----------
Total comprehensive income.......................................... $ 65,236 $ 74,981
========== ==========
13
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. DISCONTINUED OPERATIONS AND THE IMPAIRMENT OF LONG-LIVED ASSETS
As of January 1, 2002, we adopted Financial Accounting Standards Board
Statement (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," and the appropriate amounts are disclosed separately under
income from discontinued operations on the consolidated income statement. Below
represents the total revenues, rental operating expenses, depreciation and
amortization, income from discontinued operations, gain on sale of discontinued
operations and net carrying value of the properties sold and held for sale at
June 30, 2002 (which account for 834,128 rentable square feet) as a result of
our capital recycling program and included in income from discontinued
operations for the three and six months ended June 30, 2002 and 2001 ($ in
thousands):
RENTAL DEPRECIATION INCOME FROM GAIN ON SALE
TOTAL OPERATING AND DISCONTINUED OF DISCONTINUED NET CARRYING
TYPE REVENUES EXPENSES AMORTIZATION OPERATIONS OPERATIONS VALUE
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 2002
Office $ 769 $ 450 $ 270 $ 49 $ 2,964 $ 19,411
-------------------------------------------------------------------------------------
Total $ 769 $ 450 $ 270 $ 49 $ 2,964 $ 19,411
=====================================================================================
JUNE 30, 2001
Office $ 1,815 $ 588 $ 344 $ 883 $ -- $ 44,258
-------------------------------------------------------------------------------------
Total $ 1,815 $ 588 $ 344 $ 883 $ -- $ 44,258
=====================================================================================
SIX MONTHS ENDED
JUNE 30, 2002
Office $ 2,226 $ 959 $ 626 $ 641 $ 2,964 $ 19,411
-------------------------------------------------------------------------------------
Total $ 2,226 $ 959 $ 626 $ 641 $ 2,964 $ 19,411
=====================================================================================
JUNE 30, 2001
Office $ 3,597 $ 1,105 $ 693 $ 1,798 $ -- $ 44,258
-------------------------------------------------------------------------------------
Total $ 3,597 $ 1,105 $ 693 $ 1,798 $ -- $ 44,258
=====================================================================================
In addition, in accordance with SFAS 144, we have determined that as of
June 30, 2002, the carrying value of one industrial property held for sale is
greater than its fair value, less costs to sell. Additionally, we have
determined that the carrying value of one office property held and used will not
be recovered from its undiscounted future operating cash flows. In total we have
recognized a $9.9 million impairment loss, which is included in the gain on the
sale of land and depreciable assets in the consolidated statements of income for
the three and six months ended June 30, 2002.
14
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 tenant demand;
. the financial condition of our tenants could deteriorate;
. the costs of our development projects could exceed our original
estimates;
. 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 re-lease 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 and midwestern markets may suffer additional
declines in economic growth or may not recover as fully or as
quickly as expected.
This list of risks and uncertainties, however, is not intended to be
exhaustive. You should also review the other cautionary statements we make in
"Business - Risk Factors" set forth in our 2001 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. Since our formation in 1994, we have evolved into one of
the largest owners and operators of suburban office, industrial and retail
properties in the southeastern and midwestern United States. 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. At June 30, 2002, the Company owned 88.3% of the Common
Units in the Operating Partnership. At June 30, 2002, we:
. owned 500 in-service office, industrial and retail properties,
encompassing approximately 37.9 million rentable square feet;
15
. owned an interest (50.0% or less) in 76 in-service office and
industrial properties, encompassing approximately 7.4 million
rentable square feet and 418 apartment units;
. owned 1,303 acres (and have agreed to purchase an additional
eight acres over the next year) of undeveloped land suitable for
future development;
. owned 10 development properties, encompassing approximately
992,000 rentable square feet; and
. owned an interest (50.0% or less) in two development properties,
encompassing 373,000 rentable square feet.
The following summarizes our capital recycling program since the beginning
of 2000:
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2002 2001 2000
---------------- --------------- ---------------
OFFICE, INDUSTRIAL AND RETAIL PROPERTIES
(rentable square feet in thousands)
Dispositions (1) .............................................. (856) (268) (4,743)
Contributions to Joint Ventures (1) ........................... -- (118) (2,199)
Developments Placed In-Service ................................ 1,337 1,351 3,480
Acquisitions .................................................. 205 72 669
--------------- --------------- ---------------
Net Change in Wholly-owned
In-Service Properties ........................................ 686 1,037 (2,793)
=============== =============== ===============
APARTMENT PROPERTIES
(in units)
Dispositions .................................................. -- (1,672) --
=============== =============== ===============
- ----------
(1) Excludes wholly-owned development properties sold or contributed to joint
ventures.
In addition to the above property activity, the Company repurchased $2.8
million, $147.4 million and $100.2 million of Common Stock and Common Units
during 2002, 2001 and 2000, respectively, and $18.5 million of Preferred Units
during 2001.
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 June 30, 2002, the Company owned 88.3%
of the Common Units in the Operating Partnership.
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.
The estimates used in the preparation of our Consolidated Financial
Statements are more fully described in Note (1) to our audited Consolidated
Financial Statements for the year ended December 31, 2001, included in our 2001
Form 10-K. However, 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 presented for any interim period. Management
has reviewed our critical accounting policies and estimates with the audit
committee of the Company's board of directors.
We consider our critical accounting policies to be those used in the
determination of the reported amounts and disclosure related to the following:
16
. Impairment of long-lived assets;
. Allowance for doubtful accounts;
. Capitalized costs;
. Fair value of derivative instruments;
. Rental revenue; and
. Investments in joint ventures.
Impairment of long-lived assets. Real estate and leasehold improvements are
classified as long-lived assets held for sale or as long-lived assets to be held
and used. In accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we record
assets held for sale at the lower of the carrying amount or fair value less cost
to sell. The impairment loss is the amount by which the carrying amount exceeds
the fair value less cost to sell. With respect to assets classified as held and
used, we periodically review these assets to determine whether our carrying
amount will be recovered from their undiscounted future operating cash flows and
we recognize an impairment loss to the extent we believe the carrying amount is
not recoverable. Our determination of future operating cash flows requires us to
make assumptions related to future rental rates, tenant concessions, operating
expenditures, property taxes and capital improvements. If our assumptions prove
incorrect and our estimates of future operating cash flows are materially
overstated, we could be required to recognize future impairment losses on our
properties.
Allowance for doubtful accounts. Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the future. Our
receivable balance is comprised primarily of rents and operating cost recoveries
due from tenants as well as accrued rental rate increases to be received over
the life of the in-place leases. We regularly evaluate the adequacy of our
allowance for doubtful accounts considering such factors as credit quality of
our tenants, delinquency of payment, historical trends and current economic
conditions. Actual results may differ from these estimates under different
assumptions or conditions. If our assumptions regarding the collectibility of
accounts receivables prove incorrect, we could experience write-offs of accounts
receivable or accrued straight-line rents receivable in excess of our allowance
for doubtful accounts.
Capitalized costs. Expenditures directly related to both the development of
real estate assets and the leasing of properties are included in net real estate
assets and are stated at cost on the consolidated balance sheets. The
development expenditures include pre-construction costs essential to the
development of properties, development and construction costs, interest costs,
real estate taxes, salaries and other costs incurred during the period of
development. The leasing expenditures include all general and administrative
costs, including salaries incurred in connection with successfully securing
leases on the properties. Estimated costs related to unsuccessful leases are
expensed as incurred. If our assumptions regarding the successful efforts of
development and leasing are incorrect, the resulting adjustments could impact
earnings.
Fair value of derivative instruments. In the normal course of business, we
are exposed to the effect of interest rate changes. We limit our exposure by
following established risk management policies and procedures including the use
of derivatives. To mitigate our exposure to unexpected changes in interest
rates, derivatives are used primarily to hedge against rate movements on our
related debt. We are required to recognize all derivatives as either assets or
liabilities in the consolidated balance sheets and to measure those instruments
at fair value. Changes in fair value will affect either partners' capital or
net income depending on whether the derivative instrument qualifies as a hedge
for accounting purposes.
To determine the fair value of derivative instruments, we use a variety of
methods and assumptions that are based on market conditions and risks existing
at each balance sheet date. For the majority of financial instruments including
most derivatives, standard market conventions and techniques such as discounted
cash flow analysis, option pricing modes, replacement cost and termination cost
are used to determine fair value. All methods of assessing fair value result in
a general approximation of value, and such value may never actually be realized.
17
Rental revenue. Rental revenue is comprised of base rent, including
termination fees, recoveries from tenants and parking and other income. In
accordance with GAAP, base rental revenue is recognized on a straight-line basis
over the terms of the respective leases. This means that, with respect to a
particular lease, actual amounts billed in accordance with the lease during any
given period may be higher or lower than the amount of rental revenue recognized
for the period. Accrued straight-line rents receivable represents the amount by
which straight-line rental revenue exceeds rents currently billed in accordance
with lease agreements. Recoveries from tenants represent reimbursements for
certain costs as provided in the lease agreements. These costs generally include
real estate taxes, utilities, insurance, common area maintenance and other
recoverable costs.
Investments in joint ventures. We account for our investments in
unconsolidated joint ventures using the equity method of accounting because we
do not control these joint venture entities. These investments are initially
recorded at cost, as investments in unconsolidated affiliates, and are
subsequently adjusted for equity in earnings and cash contributions and
distributions. Any difference between the carrying amount of these investments
on our balance sheet and the underlying equity in net assets is amortized as an
adjustment to equity in earnings of unconsolidated affiliates over 40 years. In
connection with the MG-HIW, LLC joint venture, we have guaranteed Miller Global,
our partner who has an 80.0% interest in the joint venture, a minimum internal
rate of return on $50.0 million of their equity. If the minimum internal rate of
return is not achieved upon the sale of the assets or winding up of the joint
venture, Miller Global would receive a disproportionately greater interest of
the cash proceeds related to the assets subject to the internal rate of return
guarantee. Based upon the current operating performance of the assets and our
estimate of the residual value of the subject assets, the estimated internal
rate of return for Miller Global with respect to the assets exceeds the minimum
required return. As a result, we do not currently expect that our interest in
the joint venture will be adjusted upon the sale of the subject assets or the
winding up of the joint venture as a result of the internal rate of return
guarantee. However, if our assumptions and estimates prove incorrect, Miller
Global could receive a greater interest of the cash proceeds from any such sale
or winding up.
RESULTS OF OPERATIONS
The following table sets forth information regarding our results of
operations for the three and six months ended June 30, 2002 and 2001 ($ in
millions):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -------------------------------
2002 2001 $ CHANGE 2002 2001 $ CHANGE
--------- -------- --------- -------- -------- --------
REVENUE
Rental property................................... $ 118.2 $ 124.0 $ (5.8) $ 241.8 $ 250.4 $ (8.6)
Equity in earnings of unconsolidated affiliates... 2.4 1.4 1.0 4.9 2.1 2.8
Interest and other income......................... 1.5 6.9 (5.4) 4.4 13.7 (9.3)
--------- -------- --------- -------- -------- --------
Total Revenue........................................ 122.1 132.3 (10.2) 251.1 266.2 (15.1)
OPERATING EXPENSES:
Rental property................................... 36.7 37.9 (1.2) 74.6 74.1 0.5
Depreciation and amortization..................... 31.3 28.6 2.7 62.3 57.4 4.9
Interest expense:
Contractual..................................... 26.5 25.2 1.3 51.9 52.2 (0.3)
Amortization of deferred financing costs........ 0.3 0.7 (0.4) 0.7 1.3 (0.6)
--------- -------- --------- -------- -------- --------
26.8 25.9 0.9 52.6 53.5 (0.9)
General and administrative........................ 4.1 5.1 (1.0) 8.7 10.0 (1.3)
--------- -------- --------- -------- -------- --------
Income before gain on disposition of land and
depreciable assets, discontinued operations
and extraordinary item......................... 23.2 34.7 (11.5) 52.9 71.2 (18.3)
Gain on disposition of land and depreciable assets 6.6 5.7 0.9 7.6 12.7 (5.1)
--------- -------- --------- -------- -------- --------
Income from continuing operations............... 29.8 40.4 (10.6) 60.5 83.9 (23.4)
DISCONTINUED OPERATIONS
Income from discontinued operations............... 0.1 0.9 (0.8) 0.6 1.8 (1.2)
Gain on sale of discontinued operations........... 2.9 - 2.9 2.9 - 2.9
--------- -------- --------- -------- -------- --------
Net income before extraordinary item.............. 32.8 41.3 (8.5) 64.0 85.7 (21.7)
Extraordinary item -- loss on early extinguishment
of debt............................................. - (0.3) 0.3 - (0.5) 0.5
--------- -------- --------- -------- -------- --------
Net income........................................ 32.8 41.0 (8.2) 64.0 85.2 (21.2)
Dividends on preferred units......................... (7.7) (7.9) 0.2 (15.4) (16.1) 0.7
--------- -------- --------- -------- -------- --------
Net income available for Class A
common units..................................... $ 25.1 $ 33.1 $ (8.0) $ 48.6 $ 69.1 $ (20.5)
========= ======== ========= ======== ======== ========
18
Three Months Ended June 30, 2002. Revenues from rental operations decreased
$5.8 million, or 4.7%, from $124.0 million for the quarter ended June 30, 2001
to $118.2 million for the quarter ended June 30, 2002. The decrease was
primarily a result of a decrease in the average occupancy rates from 93.2% in
the second quarter of 2001 to 87.2% in the second quarter of 2002. In addition,
we have written off approximately $3.1 million of accrued straight-line rent
receivables from WorldCom and its affiliates as of June 30, 2002. Slightly
offsetting the decrease was an increase in rental revenues as a result of an
increase in our property portfolio in 2002 as a result of our capital recycling
program, which included 1.3 million rentable square feet of properties that were
placed in service during 2002. Our in-service wholly-owned portfolio increased
from 36.7 million square feet at June 30, 2001 to 37.9 million square feet at
June 30, 2002.
Same property rental revenue, recorded in accordance with GAAP, generated
from the 475 in-service properties wholly-owned on January 1, 2001, decreased
$7.5 million, or 6.4%, for the three months ended June 30, 2002, compared to the
three months ended June 30, 2001. Same store straight-line rent decreased $4.1
million primarily as a result of the $3.1 million write-off of the WorldCom
accrued straight-line rent receivable and a decrease of $1.0 million due to the
impact from the straight lining of rents discussed generally in our critical
accounting policies. Same store rental revenues excluding straight-line rent and
termination fees decreased $3.6 million, or 3.2%. This decrease is a result of
lower same store average occupancy, which declined from 93.1% in 2001 to 87.3%
in 2002.
During the three months ended June 30, 2002, 207 second generation leases
representing 1.9 million square feet of office, industrial and retail space were
executed at an average rate per square foot which was 2.7% lower than the
average rate per square foot on the previous leases.
Equity in earnings of unconsolidated affiliates increased $1.0 million, or
71.4%, from $1.4 million for the three months ended June 30, 2001 to $2.4
million for the three months ended June 30, 2002. The increase was primarily a
result of an increase in occupancy rates in 2002 for certain joint ventures
formed with unrelated investors and earnings from certain development joint
ventures formed with unrelated investors in late December 2000 in which the
properties have been placed in service during 2001 and 2002.
Interest and other income decreased $5.4 million, or 78.3%, from $6.9
million for the three months ended June 30, 2001 to $1.5 million for the three
months ended June 30, 2002. The decrease primarily resulted from a decrease in
leasing and development fee income in the three months ended June 30, 2002 and a
decrease in interest income in the three months ended June 30, 2002 due to lower
cash balances (during 2001, we had higher cash balances as a result of proceeds
from dispositions related to our capital recycling program that were ultimately
used in our stock repurchase program) and the collection of notes receivable
during 2001 and 2002.
Rental operating expenses (real estate taxes, utilities, insurance, repairs
and maintenance and other property-related expenses) decreased $1.2 million, or
3.2%, from $37.9 million for the three months ended June 30, 2001 to $36.7
million for the three months ended June 30, 2002. This decrease was primarily a
result of lower occupancy relative to variable operating expenses offset by
increases in real estate taxes, primarily due to higher property tax
assessments, utilities and small increases in various other rental expenses in
2002. Rental operating expenses as a percentage of related revenues increased
from 30.6% for the three months ended June 30, 2001 to 31.0% for the three
months ended June 30, 2002.
Same property rental property expenses, which are the expenses of the 475
in-service properties wholly-owned on January 1, 2001, decreased $112,713, or
0.3%, for the three months ended June 30, 2002, compared to the three months
ended June 30, 2001. This decrease was primarily a result of lower occupancy
relative to variable operating expenses offset by increases in real estate
taxes, primarily due to higher property tax assessments, utilities and small
increases in various other rental expense accounts.
Depreciation and amortization for the three months ended June 30, 2002 and
2001 totaled $31.3 million and $28.6 million, respectively. The increase of $2.7
million, or 9.4%, was due to an increase in the amortization of leasing
commissions and tenant improvements and an increase in depreciation expense
related to buildings placed in service during 2001 and 2002, partly offset by a
decrease in the depreciation expense as a result of dispositions in 2002 and
2001.
Interest expense increased $0.9 million, or 3.5%, from $25.9 million for
the three months ended June 30, 2001 to $26.8 million for the three months ended
June 30, 2002. The increase was primarily attributable to an increase in
19
the average outstanding debt for the three months ended June 30, 2002 partly
offset by a decrease in weighted average interest rates during the three months
ended June 30, 2002. Interest expense for the three months ended June 30, 2002
and 2001 included $0.3 million and $0.7 million, respectively, of amortization
of deferred financing costs and the costs related to our interest rate hedge
contracts. Capitalized interest for the three months ended June 30, 2002 and
2001 was $2.6 million and $4.1 million, respectively.
General and administrative expenses as a percentage of total revenues was
3.4% in the second quarter of 2002 and 3.9% in the second quarter of 2001.
Gain on disposition of land and depreciable assets increased $0.9 million,
or 15.8%, from $5.7 million for the quarter ended June 30, 2001 to $6.6 for the
quarter ended June 30, 2002. By 2001, the majority of the gain was a result of
the disposition of 883 apartment units. In 2002, the majority of the gain was
related to a gain of approximately $16.4 million related to the disposition of
396,000 rentable square feet of office and development properties, partly offset
by an impairment loss of approximately $9.9 million (see Note 7).
Income before gain on disposition of land and depreciable assets,
discontinued operations and extraordinary item equaled $23.2 million and $34.7
million for the quarters ended June 30, 2002 and 2001, respectively. The
Operating Partnership recorded $7.7 million and $7.9 million in preferred unit
distributions for each of the quarters ended June 30, 2002 and 2001,
respectively. The decrease in preferred unit distributions was a result of the
$18.5 million repurchase by the Company of its preferred units during 2001.
Six Months Ended June 30, 2002. Revenues from rental operations decreased
$8.6 million, or 3.4%, from $250.4 million for the six months ended June 30,
2001 to $241.8 million for the six months ended June 30, 2002. The decrease was
primarily a result of a decrease in the average occupancy rates from 93.4% for
the six months ended June 30, 2001 to 88.0% for the six months ended June 30,
2002. In addition, we have written off approximately $3.1 million of accrued
straight-line rent receivables from WorldCom and its affiliates as of June 30,
2002. Slightly offsetting the decrease was an increase in rental revenues as a
result of an increase in our property portfolio in 2002 as a result of our
capital recycling program, which included 1.3 million rentable square feet of
properties that were placed in service during 2002. Our in-service wholly-owned
portfolio increased from 36.7 million square feet at June 30, 2001 to 37.9
million square feet at June 30, 2002.
Same property rental revenue, recorded in accordance with GAAP, generated
from the 475 in-service properties wholly-owned on January 1, 2001, decreased
$10.1 million for the six months ended June 30, 2002 compared to the six months
ended June 30, 2001. Same store straight-line rent revenue decreased $5.6
million as a result of the $3.1 million write-off of the WorldCom accrued
straight-line rent receivable and a decrease of $2.5 million due to the impact
from the straight lining of rents discussed generally in our critical accounting
policies. Same store revenues excluding straight-line rent and termination fees
decreased $5.3 million, or 2.3%. This decrease is a result of lower same store
average occupancy, which declined from 93.6% in 2001 to 88.1% in 2002.
During the six months ended June 30, 2002, 344 second generation leases
representing 2.5 million square feet of office, industrial and retail space were
executed at an average rate per square foot which was 1.7% lower than the
average rate per square foot on the previous leases.
Equity in earnings of unconsolidated affiliates increased $2.8 million, or
133.5%, from $2.1 million for the six months ended June 30, 2001 to $4.9 million
for the six months ended June 30, 2002. The increase was primarily a result of
an increase in occupancy rates in 2002 for certain joint ventures formed with
unrelated investors and earnings from certain development joint ventures formed
with unrelated investors in late December 2000 in which the properties have been
placed in service during 2001 and 2002.
Interest and other income decreased $9.3 million, or 67.9%, from $13.7
million for the six months ended June 30, 2001 to $4.4 million for the six
months ended June 30, 2002. The decrease primarily resulted from a decrease in
leasing and development fee income in the six months ended June 30, 2002 and a
decrease in interest income in the six months ended June 30, 2002 due to lower
average cash balances (during 2001, we had higher cash balances as a result of
proceeds from dispositions related to our capital recycling program that were
ultimately used in our stock repurchase program) and the collection of notes
receivable during 2001 and 2002.
20
Rental operating expenses (real estate taxes, utilities, insurance, repairs
and maintenance and other property-related expenses) increased $0.5 million, or
0.7%, from $74.1 million for the six months ended June 30, 2001 to $74.6 million
for the six months ended June 30, 2002. The increase was primarily a result of
an increase in real estate taxes in 2002 partly offset by a decrease resulting
from lower occupancy relative to variable operating expenses. Rental operating
expenses as a percentage of related revenues increased from 29.6% for the six
months ended June 30, 2001 to 30.9% for the six months ended June 30, 2002.
Same property rental property expenses, which are the expenses of the 475
in-service properties wholly-owned on January 1, 2001, decreased $423,368, or
0.6%, for the six months ended June 30, 2002, compared to the six months ended
June 30, 2001. This decrease was primarily a result of lower occupancy relative
to variable operating expenses offset by increases in real estate taxes,
primarily due to higher property tax assessments, utilities and small increases
in various other rental expense accounts.
Depreciation and amortization for the six months ended June 30, 2002 and
2001 totaled $62.3 million and $57.4 million, respectively. The increase of $4.9
million, or 8.5%, was due to an increase in the amortization of leasing
commissions and tenant improvements and an increase in depreciation expense
related to buildings placed in service during 2001 and 2002, partly offset by a
decrease in the depreciation expense as a result of dispositions during 2002 and
2001.
Interest expense decreased $0.9 million, or 1.7%, from $53.5 million for
the six months ended June 30, 2001 to $52.6 million for the six months ended
June 30, 2002. The decrease was primarily attributable to the decrease in the
weighted average interest rates for the six months ended June 30, 2002, partly
offset by an increase in the average outstanding debt for the six months ended
June 30, 2002. Interest expense for the six months ended June 30, 2002 and 2001
included $0.7 million and $1.3 million, respectively, of amortization of
deferred financing costs and the costs related to our interest rate hedge
contracts. Capitalized interest for the six months ended June 30, 2002 and 2001
was $6.6 million and $7.1 million, respectively.
General and administrative expenses as a percentage of total revenues was
3.5% in the first six months of 2002 and 3.8% in the first six months of 2001.
Gain on disposition of land and depreciable assets decreased $5.1 million,
or 40.2%, from $12.7 million for the six months ended June 30, 2001 to $7.6 for
the six months ended June 30, 2002. In 2001, the majority of the gain was a
result of the disposition of 1,160 apartment units. In 2002, the majority of the
gain was related to a gain of approximately $17.4 million related to the
disposition of 524,000 rentable square feet of office and development
properties, partly offset by an impairment loss of approximately $9.9 million
(see Note 7).
Income before gain on disposition of land and depreciable assets,
discontinued operations and extraordinary item equaled $52.9 million and $71.2
million for the six months ended June 30, 2002 and 2001, respectively. The
Operating Partnership recorded $15.4 million and $16.1 million in preferred unit
distributions for each of the six months ended June 30, 2002 and 2001,
respectively. The decrease was a result of the $18.5 million repurchase by the
Company of its preferred units during 2001.
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows. The following table sets forth the changes in the
Operating Partnership's cash flows from the first six months of 2001 to the
first six months of 2002 ($ in thousands):
SIX MONTHS ENDED JUNE 30,
-------------------------------
2002 2001 CHANGE
-------------- ------------- -------------
Cash Provided By Operating Activities $ 94,639 $ 110,225 $ (15,586)
Cash Provided By Investing Activities 57,241 65,139 (7,898)
Cash Used in Financing Activities (138,817) (248,324) 109,507
The decrease in cash provided by operating activities was primarily the
result of (1) our capital recycling program and a decrease in average occupancy
rates for our wholly-owned portfolio; (2) an increase in real estate taxes in
the first six months of 2002, primarily due to higher property assessments; and
(3) a decrease in interest income and development and leasing income in 2002. In
addition, the level of net cash provided by operating activities is also
affected by the timing of receipt of revenues and payment of expenses.
21
The increase in cash provided by investing activities was primarily a
result of a decrease of $67.1 million in additions to real estate assets in the
first six months of 2002, partly offset by a decrease in the investments in
notes receivable from the first six months of 2001 to the first six months of
2002 and a decrease in the collection of advances from subsidiaries of $27.6
million from the first six months of 2001 to the first six months of 2002.
The decrease in cash used in financing activities was primarily a result of
a decrease of $136.1 million in the repurchase of common units from the first
six months of 2001 to the first six months of 2002, a decrease of $2.3 million
in distributions on common units and preferred units during 2002 and an increase
in net proceeds from the sale of common units of $12.2 million in 2002 partly
offset by an increase of $44.4 in net repayment on the unsecured revolving loan,
mortgages and notes payable from the first six months of 2001 to the first six
months of 2002.
Capitalization. Our total indebtedness at June 30, 2002 was $1.6 billion
and was comprised of $525.4 million of secured indebtedness with a weighted
average interest rate of 7.7% and $1.1 billion of unsecured indebtedness with a
weighted average interest rate of 6.5%. We do not intend to reserve funds to
retire existing secured or unsecured debt upon maturity. For a more complete
discussion of our long-term liquidity needs, see "Current and Future Cash
Needs."
The following table sets forth the maturity schedule of our mortgages and
notes payable as of June 30, 2002 ($ in thousands):
----------------------------------------------------------------
WITHIN WITHIN WITHIN
WITHIN 2-3 4-5 6 OR MORE
TOTAL 1 YEAR YEARS YEARS YEARS
----------- ----------- ----------- ----------- -----------
FIXED RATE DEBT:
Unsecured:
MOPPRS (1)............................ $ 125,000 $ - $ - $ - $ 125,000
Put Option Notes (2).................. 100,000 - - - 100,000
Notes................................. 706,500 - 246,500 110,000 350,000
Term Loan............................. - - - - -
Secured:
Mortgages and loans payable........... 493,223 9,726 64,284 118,237 300,976
----------- ----------- ----------- ----------- -----------
Total Fixed Rate Debt..................... 1,424,723 9,726 310,784 228,237 875,976
----------- ----------- ----------- ----------- -----------
VARIABLE RATE DEBT:
Unsecured:
Revolving Loan........................ 179,500 - 179,500 - -
Secured:
Revolving Loan........................ 4,409 4,409 - - -
Mortgage loan payable................. 27,726 246 23,822 3,658 -
----------- ----------- ----------- ----------- -----------
Total Variable Rate Debt.................. 211,635 4,655 203,322 3,658 -
----------- ----------- ----------- ----------- -----------
Total Mortgages and Notes Payable.............. $ 1,636,358 $ 14,381 $ 514,106 $ 231,895 $ 875,976
=========== =========== =========== =========== ===========
- ----------
(1) On February 2, 1998, the Operating Partnership sold $125.0 million of
MandatOry Par Put Remarketed Securities ("MOPPRS") due February 1, 2013.
The MOPPRS bear an interest rate of 6.835% from the date of issuance
through January 31, 2003. After January 31, 2003, the interest rate to
maturity on such MOPPRS will be 5.715% plus the applicable spread
determined as of January 31, 2003. In connection with the initial issuance
of the MOPPRS, a counter party was granted a remarketing option to purchase
the MOPPRS from the holders thereof on January 31, 2003 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 MOPPRS from
the holders on January 31, 2003 at 100.0% of the principal amount plus
accrued and unpaid interest.
(2) 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 interest 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.
22
After June 15, 2004, the interest rate to maturity on such 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.
The mortgage and loans payable and the secured revolving loan were secured
by real estate assets with an aggregate carrying value of $923.9 million at June
30, 2002.
The Operating Partnership's unsecured notes of $931.5 million bear interest
rates ranging from 6.8% to 8.1%, with interest payable semi-annually in arrears.
The 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 MOPPRS and 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.
We currently have a $300.0 million unsecured revolving loan (with $179.5
million outstanding at June 30, 2002) that matures in December 2003 and a $55.2
million secured revolving loan (with $4.4 million outstanding at June 30, 2002)
that matures in March 2003. Our unsecured revolving loan also includes a $150.0
million competitive sub-facility. Depending upon the corporate credit ratings
assigned to us from time to time by the various rating agencies, our unsecured
revolving loan bears variable rate interest at a spread above LIBOR ranging from
0.70% to 1.55% and our secured revolving loan bears variable rate interest at a
spread above LIBOR ranging from 0.55% to 1.50%. We currently have a credit
rating of BBB- assigned by Standard & Poor's, a credit rating of BBB assigned by
Fitch Inc. and a credit rating of Baa2 assigned by Moody's Investor Service. As
a result, interest currently accrues on borrowings under our unsecured revolving
loan at an average rate of LIBOR plus 85 basis points and under our secured
revolving loan at an average rate of LIBOR plus 75 basis points. In addition, we
are currently required to pay an annual facility fee equal to .20% of the total
commitment under the unsecured revolving loan.
The terms of each of our revolving loans and the indenture that governs our
outstanding notes require us to comply with various operating and financial
covenants and performance ratios. We are currently in compliance with all such
requirements. In addition, based on our current expectation of future operating
performance, we expect to remain in compliance for the foreseeable future.
Joint Ventures. During the past several years, 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. As
of June 30, 2002, our joint ventures have approximately $548.6 million of
outstanding debt. All of the joint venture debt is non-recourse to us except (1)
in the case of customary exceptions pertaining to such matters as misuse of
funds, environmental conditions and material misrepresentations and (2) with
respect to $5.0 million of construction debt related to the MG-HIW Metrowest I,
LLC, which has been guaranteed in part by us subject to a pro rata indemnity
from our joint venture partner. Our guarantee of the MG-HIW Metrowest I, LLC
debt represented 50.00% of the outstanding loan balance at June 30, 2002.
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 two revolving loans bear 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. We do not hold or issue these derivative contracts for
trading or speculative purposes.
The interest rate on all of our variable rate debt is adjusted at one- and
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.
Net payments to counterparties under interest rate hedge contracts were $415,051
during the six months ended June 30, 2002 and were recorded as
23
additional interest expense.
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, stockholder distributions
and ordinary course 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 $4.7 million renovations at Tampa Bay Park and the
$7.9 million general and non-recurring renovations at Country Club Plaza. In
addition, we could incur tenant improvements and lease commissions related to
any releasing of space currently leased by WorldCom and US Air (see "Recent
Developments") and the redevelopment of the EPA site in Research Commons.
In addition to the requirements discussed above, our short-term (within the
next 12 months) liquidity requirements also include the funding of approximately
$50.0 million of our existing development activity and first generation tenant
improvements and lease commissions on properties placed in service that are not
fully leased. See "Business -- Development Activity." 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 $114.1
million of availability as of July 26, 2002);
. borrowings under our secured revolving loan (up to $49.4 million
of availability as of July 26, 2002);
. the selective disposition of non-core assets;
. 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 June 30, 2002, we had $2.8
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 two 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, the Operating Partnership's ability to make distributions and make
other cash payments may be adversely affected.
Common Unit Repurchase Program. On April 25, 2001, we announced that the
Company's Board of Directors authorized the repurchase of up to an additional
5.0 million shares of Common Stock and Common Units. As of July 26, 2002, under
the new repurchase program, the Company had repurchased 1.4 million Common Units
at a weighted average purchase price of $24.56 per unit and a total purchase
price of $34.0 million. In determining whether or not to repurchase additional
capital stock, the Company will consider, among other factors, the effect of
repurchases on our liquidity and the price of the Company's Common Stock.
Disposition Activity. As part of our ongoing capital recycling program,
during the six months ended June 30, 2002, we have sold 856,000 square feet of
office properties and 75 acres of development land for gross proceeds of $120.2
million. In addition, we had 707,671 square feet of office properties and 99.4
acres of land under letter of
24
intent or contract for sale in various transactions totaling $79.9 million.
These transactions are subject to customary closing conditions, including due
diligence and documentation, and are expected to close during the third and
fourth quarters of 2002. However, we can provide no assurance that all or parts
of these transactions will be consummated. During the second quarter, we
recorded a $9.9 million impairment loss related to two properties we expect to
sell and/or re-develop.
RECENT DEVELOPMENTS
WorldCom Bankruptcy. 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. We currently have 13 leases encompassing 986,082
square feet in nine locations with WorldCom and its affiliates, including four
leases encompassing 828,467 square feet in four locations with Intermedia
Communications, with lease expirations ranging from 2003 to 2013. Based on June
2002 rental revenue, our annualized rental revenue from these leases is $17.5
million, or approximately 3.7% of our total annualized rental revenue.
Approximately 185,000 square feet of the space leased by Intermedia has not yet
been upfitted or occupied and we estimate that a substantial portion of the
remaining Intermedia space currently appears to be under-utilized.
In addition, our joint venture with Miller Global ("MG-HIW, LLC") has 14
leases encompassing 57,252 square feet in five locations with WorldCom and its
affiliates, including six leases encompassing 23,381 square feet in four
locations with Intermedia Communications, with lease expirations ranging from
2002 to 2007. We have a 20.0% ownership in this joint venture and, based on June
2002 rental revenue, our proportionate share of the annualized rental revenue
generated from these leases is $278,100.
Approximately 81.0% of the annualized rental revenue related to our leases
with WorldCom and its affiliates, including our pro rata share of the annualized
rental revenue related to MG-HIW, LLC, is derived from properties in Tampa. The
remainder of this revenue is derived from properties in Greenville, South
Carolina, Richmond, Raleigh, Orlando and Nashville. WorldCom and its affiliates
are current on base rental payments through August 31, 2002. However, we have
written off approximately $3.1 million of accrued straight-line rent receivables
from WorldCom and its affiliates as of June 30, 2002.
Due to the inherent uncertainties of the bankruptcy process, we are not
able to predict the impact of WorldCom's bankruptcy on its leasing and occupancy
of our properties or on our financial condition and results of operations.
U.S. Airways Bankruptcy. On August 11, 2002, US Airways Group Inc. filed a
voluntary petition with the United States Bankruptcy Court seeking relief under
Chapter 11 of the United States Bankruptcy Code. We currently have seven leases
encompassing 414,059 square feet with US Airways and its affiliates with an
average remaining lease term of 5.4 years as of June 30, 2002. Based on June
2002 rental revenue, our annualized rental revenue from these leases is $6.9
million, or approximately 1.5% of our total annualized rental revenue.
Approximately 55,000 square feet of space is currently being sub-leased by US
Airways to a third party and we estimate that the balance of the space is
approximately 75 percent utilized by US Airways as a reservation call center and
for certain revenue accounting and information technology functions. All of the
414,059 square feet of space is located in Winston-Salem, North Carolina.
US Airways is current on base rental payments through August 31, 2002. We
have an accrued straight line rent receivable from US Airways in the amount of
$495,000 as of June 30, 2002.
Due to the inherent uncertainties of the bankruptcy process, we are not
able to predict the impact of US Airways' bankruptcy on its leasing and
occupancy of our properties or on our financial condition and results of
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of disposal of long-lived assets.
This standard harmonizes the accounting for impaired assets and resolves some of
the implementation issues as originally described in SFAS No. 121. We adopted
SFAS No. 144 in the first quarter of 2002. Income from discontinued
25
operations and the gain on sale of discontinued operations for properties
meeting the criteria in accordance with SFAS No. 144 are reflected in the
consolidated statements of income as discontinued operations for all periods
presented.
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 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 property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Amortization of deferred financing costs and depreciation of non-real
estate assets are not added back to net income in arriving at FFO. In addition,
FFO includes both recurring and non-recurring operating results and income from
discontinued operations. As a result, non-recurring items that are not defined
as "extraordinary" under GAAP are reflected in the calculation of FFO.
Cash available for distribution is defined as funds from operations
increased by the amortization of deferred financing activities and reduced by
rental income from straight-line rents and non-revenue enhancing capital
expenditures for building improvements and tenant improvements and lease
commissions related to second generation space.
26
FFO and cash available for distribution for the three and six month periods
ended June 30, 2002 and 2001 are summarized in the following table ($ in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
FUNDS FROM OPERATIONS:
Income before gain on disposition of land and depreciable
assets, discontinued operations and extraordinary item. $ 23,156 $ 34,752 $ 52,833 $ 71,162
Add/(Deduct):
Distributions to preferred unit holders ........... (7,713) (7,929) (15,426) (16,074)
Transition adjustment upon adoption of FAS 133 .... -- -- -- 556
Income from discontinued operations ............... 49 883 641 1,798
Gain on disposition of land ....................... 5,989 537 5,758 1,563
Depreciation and amortization ..................... 31,561 28,986 62,921 58,111
Depreciation on unconsolidated affiliates ......... 2,046 1,825 4,430 3,734
------------ ------------ ------------ ------------
Funds from operations ......................... 55,088 59,054 111,157 120,850
CASH AVAILABLE FOR DISTRIBUTION:
Add/(Deduct):
Rental income from straight-line rents ............ 1,049 (3,550) (1,318) (6,652)
Amortization of deferred financing costs .......... 341 675 680 1,340
Non-incremental revenue generating capital .......
expenditures (1):
Building improvements paid ..................... (2,370) (2,014) (3,121) (3,087)
Second generation tenant improvements paid ..... (3,380) (4,021) (6,911) (7,776)
Second generation lease commissions paid ....... (3,049) (3,541) (5,659) (8,328)
------------ ------------ ------------ ------------
Cash available for distribution .............. $ 47,679 $ 46,603 $ 94,828 $ 96,347
============ ============ ============ ============
Weighted average common units
outstanding - basic .................................. 59,954 61,082 59,907 62,336
============ ============ ============ ============
Weighted average common units
outstanding - diluted ................................ 60,439 61,473 60,358 62,725
============ ============ ============ ============
DIVIDEND PAYOUT RATIOS:
Funds from operations ............................... 64.2% 59.3% 63.5% 59.2%
============ ============ ============ ============
Cash available for distribution ..................... 74.2% 75.2% 74.5% 74.2%
============ ============ ============ ============
- ----------
(1) Amounts represent cash expenditures.
27
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 June 30, 2002 and 2001:
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- ---------------------------------
PERCENT PERCENT
RENTABLE LEASED/ RENTABLE LEASED/
SQUARE FEET PRE-LEASED SQUARE FEET PRE-LEASED
--------------- --------------- --------------- ---------------
IN-SERVICE:
Office 25,787,000 87% 24,639,000 93%
Industrial 10,468,000 84% 10,396,000 93%
Retail (1) 1,651,000 96% 1,628,000 95%
--------------- --------------- --------------- ---------------
Total or Weighted Average 37,906,000 86% 36,663,000 93%
=============== =============== =============== ===============
DEVELOPMENT:
Completed--Not Stabilized
Office 735,000 29% 1,019,000 51%
Industrial 136,000 29% 184,000 21%
Retail 20,000 90% -- --
--------------- --------------- --------------- ---------------
Total or Weighted Average 891,000 30% 1,203,000 47%
=============== =============== =============== ===============
IN PROCESS
Office (2) 201,000 70% 1,669,000 61%
Industrial (2) 60,000 0% 258,000 9%
Retail -- -- 20,000 72%
--------------- --------------- --------------- ---------------
Total or Weighted Average 261,000 54% 1,947,000 54%
=============== =============== =============== ===============
TOTAL:
Office 26,723,000 27,327,000
Industrial 10,664,000 10,838,000
Retail (1) 1,671,000 1,648,000
--------------- ---------------
Total or Weighted Average 39,058,000 39,813,000
=============== ===============
- ----------
(1) Excludes basement space.
(2) Includes properties that we have an option to purchase.
28
The following table sets forth information concerning the 20 largest
customers of our wholly-owned properties as of June 30, 2002 ($ in
thousands):
PERCENT OF TOTAL AVERAGE
NUMBER RENTAL ANNUALIZED ANNUALIZED REMAINING LEASE
CUSTOMERS OF LEASES SQUARE FEET RENTAL REVENUE (1) RENTAL REVENUE(1) TERM IN YEARS
- --------- --------- --------------- -------------------- -------------------- --------------------
Intermedia Communications/
WorldCom...................... 13 986,082 $ 17,466 3.71% 8.1
AT&T........................... 10 854,992 10,041 2.98 5.6
Federal Government............. 55 644,188 12,151 2.58 4.0
Capital One Services........... 6 587,188 10,199 2.17 6.1
IBM............................ 5 354,507 7,899 1.68 6.5
Caterpillar Financial Services. 1 300,901 7,899 1.68 12.7
PricewaterhouseCoopers......... 7 307,158 7,038 1.50 7.7
US Air......................... 7 414,059 6,909 1.47 5.4
State of Georgia............... 9 349,690 6,485 1.38 6.0
Bell South..................... 12 223,774 4,595 0.98 1.7
Sara Lee....................... 8 1,184,134 4,404 0.94 3.0
Northern Telecom, Inc.......... 2 283,298 3,921 0.83 4.7
Lockton Companies, Inc......... 1 127,485 3,117 0.66 12.7
Volvo.......................... 5 214,783 2,979 0.63 7.1
Bank of America................ 20 153,464 2,894 0.62 1.8
International Paper Co......... 10 121,174 2,887 0.61 0.5
Hartford Insurance............. 6 134,021 2,856 0.61 3.8
Business Telecom, Inc.......... 4 145,497 2,832 0.60 2.8
Voicestream Wireless........... 2 120,561 2,765 0.59 4.0
Ford Motor Company............. 2 129,158 2,640 0.56 7.5
---------- --------------- -------------------- -------------------- --------------------
Total 185 7,636,114 $ 125,977 26.78% 6.1
========== =============== ==================== ==================== ====================
- ----------
(1) Annualized rental revenue is June 2002 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
29
As of June 30, 2002, we were developing nine suburban office properties,
two industrial properties and one retail property totaling 1.2 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 partner two additional properties totaling
373,000 rentable square feet. At June 30, 2002, this development project had an
aggregate anticipated total investment of $80.7 million and was 51.0%
pre-leased.
IN-PROCESS
ANTICIPATED
RENTABLE TOTAL INVESTMENT
NAME MARKET SQUARE FEET INVESTMENT AT 06/30/02
- ----------------------- ----------------- --------------- --------------- ---------------
($ IN THOUSANDS)
OFFICE:
1825 Century Center Atlanta 101,000 $ 16,254 $ 14,027
801 Raleigh Corporate
Center (2) Research Triangle 100,000 12,016 5,757
--------------- --------------- ---------------
In-Process Office
Total or Weighted
Average 201,000 $ 28,270 $ 19,784
=============== =============== ===============
INDUSTRIAL:
Tradeport V (2) Atlanta 60,000 $ 2,913 $ 484
--------------- --------------- ---------------
In-Process Industrial
Total or Weighted
Average 60,000 $ 2,913 $ 484
=============== =============== ===============
Total or Weighted
Average of all
In-Process
Development Projects 261,000 $ 31,183 $ 20,268
=============== =============== ===============
PRE-LEASING ESTIMATED ESTIMATED
NAME PERCENTAGE(1) COMPLETION STABILIZATION (3)
- ----------------------- --------------- --------------- ---------------
OFFICE:
1825 Century Center 100% 3Q02 3Q02
801 Raleigh Corporate
Center (2) 40 4Q02 2Q04
---------------
In-Process Office
Total or Weighted
Average 70%
===============
INDUSTRIAL:
Tradeport V (2) 0% 4Q02 4Q03
---------------
In-Process Industrial
Total or Weighted
Average 0%
===============
Total or Weighted
Average of all
In-Process
Development Projects 54%
===============
- ----------
(1) Letters of intent comprise 1% of the total pre-leasing percentage.
(2) We are developing these properties for a third party and own an option to
purchase each property.
(3) We consider a development project to be stabilized on the date such
project is at least 95% occupied.
30
COMPLETED--NOT STABILIZED (2)
ANTICIPATED
RENTABLE TOTAL INVESTMENT
NAME MARKET SQUARE FEET INVESTMENT AT 06/30/02
- ----------------------- ----------------- --------------- --------------- ---------------
($ IN THOUSANDS)
OFFICE:
Met Life Building
At Brookfield Greenville 115,000 $ 13,220 $ 12,101
Hickory Trace Nashville 52,000 5,933 6,623
1501 Highwoods
Boulevard Piedmont Triad 98,000 11,290 9,931
Seven Springs I Nashville 131,000 15,556 12,656
Centre Green Four Research Triangle 100,000 11,764 9,395
GlenLake I Research Triangle 158,000 22,417 18,812
Shadow Creek II Memphis 81,000 8,750 6,980
--------------- --------------- ---------------
Office Total
or Weighted
Average 735,000 $ 88,930 $ 76,498
=============== =============== ===============
INDUSTRIAL:
Newpont IV Atlanta 136,000 $ 5,288 $ 4,626
--------------- --------------- ---------------
Completed-Not
Stabilized Industrial
Total or Weighted
Average 136,000 $ 5,288 $ 4,626
=============== =============== ===============
RETAIL:
Granada Shops Kansas City 20,000 $ 5,020 $ 4,173
--------------- --------------- ---------------
Completed-Not
Stabilized Retail
Total or Weighted
Average 20,000 $ 5,020 $ 4,173
=============== =============== ===============
Total or Weighted
Average of all
Completed-
Not Stabilized
Development Projects 891,000 $ 99,238 $ 85,297
=============== =============== ===============
Total or Weighted
Average of all
Development Projects 1,152,000 $ 130,421 $ 105,565
=============== =============== ===============
PRE-LEASING ESTIMATED ESTIMATED
NAME PERCENTAGE (1) COMPLETION STABILIZATION (3)
- ----------------------- --------------- --------------- ---------------
OFFICE:
Met Life Building
At Brookfield 95% 3Q01 3Q02
Hickory Trace 86 3Q01 3Q02
1501 Highwoods
Boulevard 4 4Q01 4Q02
Seven Springs I 12 1Q02 1Q03
Centre Green Four 0 4Q01 2Q03
GlenLake I 14 4Q01 2Q03
Shadow Creek II 19 4Q01 4Q03
--------------
Office Total
or Weighted
Average 29%
==============
INDUSTRIAL:
Newpont IV 29% 4Q01 1Q03
---------------
Completed-Not
Stabilized Industrial
Total or Weighted
Average 29%
===============
RETAIL:
Granada Shops 90% 4Q01 2Q03
---------------
Completed-Not
Stabilized Retail
Total or Weighted
Average 90%
===============
Total or Weighted
Average of all
Completed-
Not Stabilized
Development Projects 30%
===============
Total or Weighted
Average of all
Development Projects 36%
===============
- ----------
(1) Letters of intent comprise 1% of the total pre-leasing percentage.
(2) These properties contributed $362,000 in Net Operating Income (Property
revenue less property expense) during the three months ended June 30,
2002.
(3) We consider a development project to be stabilized on the date such
project is at least 95% occupied.
31
DEVELOPMENT ANALYSIS
ANTICIPATED
RENTABLE TOTAL PRE-LEASING
SQUARE FEET INVESTMENT PERCENTAGE (1)
----------- ----------- --------------
($ IN THOUSANDS)
SUMMARY BY ESTIMATED STABILIZATION DATE:
Third Quarter 2002........................................... 268,000 $ 35,407 95%
Fourth Quarter 2002.......................................... 199,000 11,290 19%
First Quarter 2003........................................... 267,000 20,844 21%
Second Quarter 2003.......................................... 258,000 39,201 9%
Fourth Quarter 2003.......................................... 60,000 11,663 0%
Second Quarter 2004.......................................... 100,000 12,016 40%
----------- ----------- --------------
Total or Weighted Average.................................... 1,152,000 $ 130,421 36%
=========== =========== ==============
SUMMARY BY MARKET:
Atlanta...................................................... 297,000 $ 24,455 47%
Greenville................................................... 115,000 13,220 95%
Kansas City.................................................. 20,000 5,020 90%
Memphis...................................................... 81,000 8,750 19%
Nashville.................................................... 183,000 21,489 33%
Piedmont Triad............................................... 98,000 11,290 4%
Research Triangle............................................ 358,000 46,197 17%
----------- ----------- --------------
Total or Weighted Average.................................... 1,152,000 $ 130,421 36%
=========== =========== ==============
Build-to-Suit................................................ 101,000 $ 16,254 100%
Multi-Tenant................................................. 1,051,000 114,167 29%
----------- ----------- --------------
Total or Weighted Average.................................... 1,152,000 $ 130,421 36%
=========== =========== ==============
AVERAGE AVERAGE
RENTABLE ANTICIPATED
SQUARE TOTAL AVERAGE
FEET INVESTMENT PRE-LEASING (1)
----------- ----------- --------------
($ IN THOUSANDS)
AVERAGE PER PROPERTY BY TYPE:
Office....................................................... 104,000 $ 13,022 38%
Industrial................................................... 98,000 4,101 20%
Retail....................................................... 20,000 5,020 90%
----------- ----------- --------------
Weighted Average............................................. 96,000 $ 10,868 36%
=========== =========== ==============
- ----------
(1) Letters of intent comprise 1% of the total pre-leasing percentage.
32
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 June 30 and March 31, 2002 and December 31 and September 30,
2001.
OFFICE LEASING STATISTICS THREE MONTHS ENDED
---------------------------------------------------------------------
6/30/02 3/31/02 12/31/01 9/30/01 AVERAGE
------------ ------------ ----------- ----------- -----------
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)... 162 110 116 135 131
Rentable square footage leased................. 874,467 417,102 437,454 630,043 589,767
Average per rentable square foot over the
lease term:
Base rent.................................... $ 16.86 $ 16.83 $ 17.85 $ 17.03 $ 17.14
Tenant improvements.......................... (0.86) (0.98) (1.19) (0.90) (0.98)
Leasing commissions.......................... (0.56) (0.78) (0.97) (0.59) (0.73)
Rent concessions............................. (0.14) (0.15) (0.11) (0.11) (0.13)
------------ ------------ ---------- ----------- -----------
Effective rent............................... $ 15.30 $ 14.92 $ 15.58 $ 15.43 $ 15.31
Expense stop(1).............................. (5.17) (5.17) (4.50) (4.54) (4.85)
------------ ------------ ---------- ----------- -----------
Equivalent effective net rent................ $ 10.13 $ 9.75 $ 11.08 $ 10.89 $ 10.46
============ ============ =========== =========== ===========
Average term in years.......................... 4.1 4.1 4.6 4.5 4.3
============ ============ =========== =========== ===========
CAPITAL EXPENDITURES RELATED TO RELEASED SPACE:
Tenant Improvements:
Total dollars committed under
signed leases............................... $ 3,481,988 $ 2,031,231 $ 2,647,115 $ 2,431,063 $ 2,647,849
Rentable square feet......................... 874,467 417,102 437,454 630,043 589,767
------------ ------------ ----------- ----------- -----------
Per rentable square foot..................... $ 3.98 $ 4.87 $ 6.05 $ 3.86 $ 4.49
============ ============ =========== =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases............................... $ 1,272,854 $ 984,220 $ 1,277,523 $ 1,018,216 $ 1,138,203
Rentable square feet......................... 874,467 417,102 437,454 630,043 589,767
------------ ------------ ----------- ----------- -----------
Per rentable square foot..................... $ 1.46 $ 2.36 $ 2.92 $ 1.62 $ 1.93
============ ============ =========== =========== ===========
Total:
Total dollars committed under
signed leases............................... $ 4,754,842 $ 3,015,450 $ 3,924,637 $ 3,449,279 $ 3,786,052
Rentable square feet......................... 874,467 417,102 437,454 630,043 589,767
------------ ------------ ----------- ----------- -----------
Per rentable square foot..................... $ 5.44 $ 7.23 $ 8.97 $ 5.47 $ 6.42
============ ============ =========== =========== ===========
RENTAL RATE TRENDS:
Average final rate with expense
pass throughs................................. $ 16.85 $ 16.45 $ 16.47 $ 16.27 $ 16.51
Average first year cash rental rate (2)........ $ 16.06 $ 15.84 $ 17.25 $ 16.51 $ 16.41
------------ ------------- ----------- ----------- ------------
Percentage (decrease)/increase................. (4.7)% (3.8)% 4.7% 1.5% (0.6)%
============ ============ =========== =========== ===========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) for which
we will not be reimbursed by our tenants.
(2) First year cash rental rate is equal to base rent less concessions.
33
INDUSTRIAL LEASING STATISTICS THREE MONTHS ENDED
--------------------------------------------------------------------
6/30/02 3/31/02 12/31/01 9/30/01 AVERAGE
------------ ------------ ----------- ----------- -----------
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)... 32 15 31 26 26
Rentable square footage leased................. 1,005,765 78,844 894,865 285,241 566,179
Average per rentable square foot over the
lease term:
Base rent................................... $ 3.58 $ 6.95 $ 3.52 $ 4.71 $ 4.69
Tenant improvements......................... (0.29) (1.10) (0.24) (0.38) (0.50)
Leasing commissions......................... (0.14) (0.21) (0.10) (0.11) (0.14)
Rent concessions............................ (0.03) -- -- -- (0.01)
------------ ------------ ----------- ----------- -----------
Effective rent.............................. $ 3.12 $ 5.64 $ 3.18 $ 4.22 $ 4.04
Expense stop (1)............................ (0.09) (0.72) (0.18) (0.30) (0.32)
------------ ------------ ----------- ----------- -----------
Equivalent effective net rent............... $ 3.03 $ 4.92 $ 3.00 $ 3.92 $ 3.72
============ ============ =========== =========== ===========
Average term in years.......................... 6.3 4.1 2.2 3.3 4.0
============ ============ =========== =========== ===========
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under signed leases. $ 2,088,547 $ 386,263 $ 661,591 $ 606,380 $ 935,695
Rentable square feet........................ 1,005,765 78,844 894,865 285,241 566,179
------------ ------------ ----------- ----------- -----------
Per rentable square foot.................... $ 2.08 $ 4.90 $ 0.74 $ 2.13 $ 1.65
============ ============ =========== =========== ===========
Leasing Commissions:
Total dollars committed under signed leases. $ 797,939 $ 44,100 $ 257,010 $ 87,034 $ 296,521
Rentable square feet........................ 1,005,765 78,844 894,865 285,241 566,179
------------ ------------ ----------- ----------- -----------
Per rentable square foot.................... $ 0.79 $ 0.56 $ 0.29 $ 0.31 $ 0.52
============ ============ =========== =========== ===========
Total:
Total dollars committed under signed leases. $ 2,886,486 $ 430,363 $ 918,601 $ 693,414 $ 1,232,216
Rentable square feet........................ 1,005,765 78,844 894,865 285,241 566,179
------------ ------------ ----------- ----------- -----------
Per rentable square foot.................... $ 2.87 $ 5.46 $ 1.03 $ 2.43 $ 2.18
============ ============ =========== =========== ===========
RENTAL RATE TRENDS:
Average final rate with expense pass throughs.. $ 3.61 $ 6.99 $ 3.58 $ 4.85 $ 4.76
Average first year cash rental rate (2)........ $ 3.53 $ 6.69 $ 3.49 $ 4.60 $ 4.58
------------ ------------ ----------- ----------- -----------
Percentage (decrease)/increase................. (2.2)% (4.2)% (2.3)% (5.1)% (3.7)%
============ ============ =========== =========== ===========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) for which
we will not be reimbursed by our tenants.
(2) First year cash rental rate is equal to base rent less concessions.
34
RETAIL LEASING STATISTICS THREE MONTHS ENDED
---------------------------------------------------------------------------
6/30/02 3/31/02 12/31/01 9/30/01 AVERAGE
------------ ------------- ------------ ------------ ------------
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)... 13 12 12 9 12
Rentable square footage leased................. 52,527 59,649 26,019 40,283 44,620
Average per rentable square foot over the
lease term:
Base rent................................... $ 18.15 $ 25.66 $ 15.75 $ 16.33 $ 18.97
Tenant improvements......................... (1.83) (1.87) (0.63) (1.49) (1.46)
Leasing commissions......................... (0.65) (0.35) (0.82) (0.75) (0.64)
Rent concessions............................ (0.03) (0.02) -- -- (0.01)
------------ ------------- ------------ ------------ ------------
Effective rent.............................. $ 15.64 $ 23.42 $ 14.30 $ 14.09 $ 16.86
Expense stop (1)............................ (1.02) -- -- -- (0.26)
------------ ------------- ------------ ------------ ------------
Equivalent effective net rent............... $ 14.62 $ 23.42 $ 14.30 $ 14.09 $ 16.60
============ ============= ============ ============ ============
Average term in years.......................... 7.0 6.5 6.7 8.8 7.3
============ ============= ============ ============ ============
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under signed leases. $ 1,077,825 $ 738,605 $ 148,860 $ 526,500 $ 622,948
Rentable square feet........................ 52,527 59,649 26,019 40,283 44,620
------------ ------------- ------------ ------------ ------------
Per rentable square foot.................... $ 20.52 $ 12.38 $ 5.72 $ 13.07 $ 13.96
============ ============= ============ ============ ============
Leasing Commissions:
Total dollars committed under signed leases. $ 151,268 $ 61,981 $ 73,314 $ 196,296 $ 120,715
Rentable square feet........................ 52,527 59,649 26,019 40,283 44,620
------------ ------------- ------------ ------------ ------------
Per rentable square foot.................... $ 2.88 $ 1.04 $ 2.82 $ 4.87 $ 2.71
============ ============= ============ ============ ============
Total:
Total dollars committed under signed leases. $ 1,229,093 $ 800,586 $ 222,174 $ 722,796 $ 743,662
Rentable square feet........................ 52,527 59,649 26,019 40,283 44,620
------------ ------------- ------------ ------------ ------------
Per rentable square foot.................... $ 23.40 $ 13.42 $ 8.54 $ 17.94 $ 16.67
============ ============= ============ ============ ============
Rental Rate Trends:
Average final rate with expense pass throughs.. $ 17.38 $ 18.25 $ 14.16 $ 11.28 $ 15.27
Average first year cash rental rate (2)........ $ 25.30 $ 23.54 $ 16.24 $ 14.82 $ 19.97
------------ ------------- ------------ ------------ ------------
Percentage increase............................ 45.6% 28.9% 14.7% 31.4% 30.8%
============ ============= ============ ============ ============
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) for which
we will not be reimbursed by our tenants.
(2) First year cash rental rate is equal to base rent less concessions.
35
The following tables set forth scheduled lease expirations at our wholly
owned in-service properties (excluding apartment units) as of June 30, 2002,
assuming no tenant exercises renewal options.
OFFICE PROPERTIES:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- -----------
($ IN THOUSANDS)
2002 (2) 472 1,875,426 8.3% $ 33,142 $17.67 8.5%
2003 553 3,399,318 15.1% 58,294 17.15 14.8%
2004 501 2,946,726 13.1% 53,133 18.03 13.6%
2005 436 3,123,080 13.9% 55,058 17.63 14.0%
2006 312 2,835,436 12.6% 51,286 18.09 13.1%
2007 135 1,587,833 7.1% 25,028 15.76 6.4%
2008 81 1,791,348 8.0% 28,668 16.00 7.3%
2009 23 720,140 3.2% 12,388 17.20 3.2%
2010 40 1,401,967 6.2% 25,465 18.16 6.5%
2011 38 1,320,434 5.9% 22,438 16.99 5.7%
Thereafter 115 1,493,851 6.6% 27,147 18.17 6.9%
----- ---------- ----- -------- ------ -----
2,706 22,495,559 100.0% $392,047 $17.43 100.0%
===== ========== ===== ======== ====== =====
INDUSTRIAL PROPERTIES:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- ------------
($ IN THOUSANDS)
2002 (3) 108 1,302,081 14.9% $ 6,455 $ 4.96 15.9%
2003 85 1,068,830 12.2% 5,480 5.13 13.5%
2004 91 2,502,631 28.7% 9,625 3.85 23.8%
2005 52 1,006,248 11.5% 4,922 4.89 12.1%
2006 34 718,943 8.2% 3,852 5.36 9.5%
2007 23 1,230,906 14.1% 5,248 4.26 12.9%
2008 7 214,340 2.5% 1,404 6.55 3.5%
2009 7 273,813 3.1% 1,941 7.09 4.8%
2010 3 46,508 0.5% 340 7.31 0.8%
2011 1 33,555 0.4% 159 4.74 0.4%
Thereafter 19 344,575 3.9% 1,140 3.31 2.8%
---- ---------- ----- -------- ------ -----
430 8,742,430 100.0% $ 40,566 $ 4.64 100.0%
==== ========== ===== ======== ====== =====
- ----------
(1) Annual Rents Under Expiring Leases are June 2002 rental revenue (base rent
plus operating expense pass-throughs) multiplied by 12.
(2) Includes 196,000 square feet of leases that are on a month-to-month basis
or 0.7% of total annualized revenue
(3) Includes 188,000 square feet of leases that are on a month-to-month basis
or 0.2% of total annualized revenue
36
RETAIL PROPERTIES:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- ------------
($ IN THOUSANDS)
2002 (2) 36 89,813 5.6% $ 1,236 $13.76 3.3%
2003 36 94,516 5.9% 2,290 24.23 6.0%
2004 40 209,108 13.1% 2,776 13.28 7.3%
2005 39 93,505 5.9% 2,665 28.50 7.0%
2006 38 111,064 7.0% 2,768 24.92 7.3%
2007 30 120,487 7.6% 2,205 18.30 5.8%
2008 25 124,318 7.8% 4,293 34.53 11.3%
2009 21 168,355 10.6% 3,298 19.59 8.7%
2010 18 97,372 6.1% 2,856 29.33 7.5%
2011 19 108,418 6.8% 2,573 23.73 6.8%
Thereafter 26 375,696 23.6% 10,965 29.19 29.0%
---- ---------- ----- -------- ------ -----
328 1,592,652 100.0% $ 37,925 $23.81 100.0%
==== ========== ===== ======== ====== =====
TOTAL:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- ------------
($ IN THOUSANDS)
2002 (3) 616 3,267,320 10.0% $ 40,833 $12.50 8.7%
2003 674 4,562,664 13.9% 66,064 14.48 14.1%
2004 632 5,658,465 17.1% 65,534 11.58 14.0%
2005 527 4,222,833 12.9% 62,645 14.83 13.3%
2006 384 3,665,443 11.2% 57,906 15.80 12.3%
2007 188 2,939,226 9.0% 32,481 11.05 6.9%
2008 113 2,130,006 6.5% 34,365 16.13 7.3%
2009 51 1,162,308 3.5% 17,627 15.17 3.7%
2010 61 1,545,847 4.7% 28,661 18.54 6.1%
2011 58 1,462,407 4.5% 25,170 17.21 5.3%
Thereafter 160 2,214,122 6.7% 39,252 17.73 8.3%
----- ---------- ----- -------- ------ -----
3,464 32,830,641 100.0% $470,538 $14.33 100.0%
===== ========== ===== ======== ====== =====
- ----------
(1) Annual Rents Under Expiring Leases are June 2002 rental revenue (base rent
plus operating expense pass-throughs) multiplied by 12.
(2) Includes 27,000 square feet of leases that are on a month-to-month basis or
0.0% of total annualized revenue
(3) Includes 413,000 square feet of leases that are on a month-to-month basis
or 1.0% of total annualized revenue
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 tenants to pay their share of
increases in operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing our exposure to inflation.
37
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 our revolving loans
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.
As of June 30, 2002, the Operating Partnership had approximately $211.7
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 June
30, 2003, our interest expense would be increased or decreased approximately
$2.1 million.
38
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
---------- -----------
10.1 Amended and Restated 1994 Stock Option Plan
99.1 Statement of Chief Executive Officer of Highwoods
Properties Inc., general partner of the Operating Partnership
99.2 Statement of Chief Financial Officer of Highwoods
Properties Inc., general partner of the Operating Partnership
39
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: August 14, 2002
40